The Buffer-Stock Model and the Aggregate Propensity to Consume: A Panel-Data Study of the Us States

41 Pages Posted: 10 Aug 2004

See all articles by Maria Jose Luengo-Prado

Maria Jose Luengo-Prado

Indus Center for Academic Excellence

Bent E. Sørensen

University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 2004

Abstract

We simulate a buffer-stock model of consumption, explicitly aggregate over consumers, and estimate aggregate marginal propensities to consume out of current and lagged income using simulated data generated by the model. We calculate the predicted marginal effects of changing persistence of income shocks, aggregate-level uncertainty, and individual-level risk. Next, we estimate marginal propensities for US states using panel-data methods. We find effects of persistence that clearly correspond to the predictions of the model and, while the effect of aggregate uncertainty cannot be determined precisely, indicators of individual level uncertainty have strong effects consistent with the model. Overall, the buffer-stock model clearly helps explain differences in consumer behavior across states.

Keywords: Buffer-stock, consumption, precautionary saving

JEL Classification: E21

Suggested Citation

Luengo-Prado, Maria Jose and Sorensen, Bent E., The Buffer-Stock Model and the Aggregate Propensity to Consume: A Panel-Data Study of the Us States (July 2004). Available at SSRN: https://ssrn.com/abstract=574543

Maria Jose Luengo-Prado (Contact Author)

Indus Center for Academic Excellence ( email )

Bent E. Sorensen

University of Houston - Department of Economics ( email )

204 McElhinney Hall
Houston, TX 77204-5882
United States
713-743-3841 (Phone)
713-743-3798 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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