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Christopher D Carroll - One of the best experts on this subject based on the ideXlab platform.

  • a theory of the consumption function with and without liquidity constraints
    Journal of Economic Perspectives, 2001
    Co-Authors: Christopher D Carroll
    Abstract:

    Fifteen years ago, Milton Friedman’s 1957 treatise A Theory of the Consumption Function seemed badly dated. Dynamic optimization theory had not been employed much in economics when Friedman wrote, and utility theory was still comparatively primitive, so his statement of the “Permanent Income Hypothesis” never actually specified a formal mathematical model of behavior derived explicitly from utility maximization. Instead, Friedman relied at crucial points on intuition and verbal descriptions of behavior. Although these descriptions sounded plausible, when other economists subsequently found multiperiod maximizing models that could be solved explicitly, the implications of those models differed sharply from Friedman’s intuitive description of his “model.” Furthermore, empirical tests in the 1970s and 1980s often rejected these rigorous versions of the Permanent Income Hypothesis in favor of an alternative Hypothesis that many households simply spent all of their current Income. Today, with the benefit of a further round of mathematical (and computational) advances, Friedman’s (1957) original analysis looks more prescient than primitive. It turns out that when there is meaningful uncertainty in future labor Income, the optimal behavior of moderately impatient consumers is much better described by Friedman’s original statement of the Permanent Income Hypothesis than by the later explicit maximizing versions. Furthermore, in a remarkable irony, much of the empirical evidence that rejected the Permanent Income Hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with Friedman’s original description of the model and with the new version with serious uncertainty. There are four key differences between the explicit maximizing models

  • buffer stock saving and the life cycle Permanent Income Hypothesis
    Quarterly Journal of Economics, 1997
    Co-Authors: Christopher D Carroll
    Abstract:

    This paper argues that the typical household’s saving is better described by a “bufferstock” version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important Income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes; in contrast, buffer-stock consumers set average consumption growth equal to average labor Income growth, regardless of tastes. The model can explain three empirical puzzles: the “consumption/Income parallel” of Carroll and Summers [1991]; the “consumption/Income divergence” first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes.

  • buffer stock saving and the life cycle Permanent Income Hypothesis
    1996
    Co-Authors: Christopher D Carroll
    Abstract:

    This paper argues that the typical household's saving is better described by a traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important Income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes; in contrast, buffer-stock consumers set average consumption growth equal to average labor Income growth, regardless of tastes. The model can explain three empirical puzzles: the [1991]; the the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes.

Neng Wang - One of the best experts on this subject based on the ideXlab platform.

  • caballero meets bewley the Permanent Income Hypothesis in general equilibrium
    Social Science Research Network, 2005
    Co-Authors: Neng Wang
    Abstract:

    The Permanent-Income Hypothesis (PIH) of Milton Friedman (1957) states that the agent saves in anticipation of possible future declines in labor Income (John Y. Campbell, 1987). He also saves for precautionary reasons, and dissaves because of impatience. To justify the PIH in an intertemporal optimization framework, it has been conventional to assume both (i) quadratic utility, to turn off precautionary motives (Hall, 1978), and (ii) equality between the subjective discount rate and the interest rate, in order to rule out dissavings for lack of patience. Neither assumption is plausible. Much work on consumption in the past decade has focused on individual's precautionary savings motives and liquidity constraints. Impatience is a standard result in heterogeneous agents general-equilibrium incomplete-markets models, generally known as Bewley models. This paper shows that the PIH is in any case the optimal rule, in a Bewley model, in which each agent solves the precautionary-savings model of Caballero (1990, 1991). In addition to the demand for savings for a rainy day, Caballero's model also predicts a constant precautionary - savings demand and constant dissavings due to impatience. In equilibrium, I show that these two forces must cancel each other. As a result, the agent behaves in accordance with the PIH.

  • caballero meets bewley the Permanent Income Hypothesis in general equilibrium
    The American Economic Review, 2003
    Co-Authors: Neng Wang
    Abstract:

    The Permanent-Income Hypothesis (PIH) of Milton Friedman (1957) states that the agent saves in anticipation of possible future declines in labor Income (John Y. Campbell, 1987). He also saves for precautionary reasons, and dissaves because of impatience. To justify the PIH in an intertemporal optimization framework, it has been conventional to assume both (i) quadratic utility, to turn off precautionary motives (Robert E. Hall, 1978), and (ii) equality between the subjective discount rate and the interest rate, in order to rule out dissavings for lack of patience. Neither assumption is plausible. Much work on consumption in the past decade has focused on individual’s precautionary savings motives and liquidity constraints. Impatience is a standard result in heterogeneousagents general-equilibrium incomplete-markets models, generally known as Bewley models. This paper shows that the PIH is in any case the optimal rule, in a Bewley model, in which each agent solves the precautionary-savings model of Caballero (1990, 1991). In addition to the demand for savings for a “rainy day,” Caballero’s model also predicts a constant precautionary-savings demand and constant dissavings due to impatience. In equilibrium, I show that these two forces must cancel each other. As a result, the agent behaves in accordance with the PIH. Section I describes the model. Section II concludes. The Appendix provides a heuristic derivation and a proof of the optimal consumption rule.

Roberto Ricciuti - One of the best experts on this subject based on the ideXlab platform.

  • assessing ricardian equivalence
    Social Science Research Network, 2003
    Co-Authors: Roberto Ricciuti
    Abstract:

    This paper reviews the literature on Ricardian equivalence. This Hypothesis may be interpreted as a generalization to the short and the long run of the theories that put no weight on the real effects of public policies on aggregate demand. We argue that Ricardian equivalence relies on both the Permanent Income Hypothesis and the fulfillment of the intertemporal government budget constraint. The theoretical literature emphasizes several reasons for departures from this Hypothesis. However, the empirical literature is inconclusive. When Ricardian equivalence is tested in a life-cycle framework the Hypothesis is usually rejected, while when the empirical analysis is based on optimizing models, it is usually accepted.

  • assessing ricardian equivalence
    Journal of Economic Surveys, 2003
    Co-Authors: Roberto Ricciuti
    Abstract:

    This paper reviews the literature on Ricardian equivalence. This Hypothesis may be interpreted as a generalisation to the short and the long run of the theories which put no weight on the real effects of public policies on aggregate demand. We argue that Ricardian equivalence relies on both Permanent Income Hypothesis and the fulfilment of the intertemporal government budget constraint. The theoretical literature emphasises several reasons for departures from this Hypothesis. However, the empirical literature is inconclusive. When Ricardian equivalence is tested in a life-cycle framework the Hypothesis is usually rejected, while when the empirical analysis is based on optimising models, it is usually accepted.

Takashi Unayama - One of the best experts on this subject based on the ideXlab platform.

  • the consumption response to seasonal Income evidence from japanese public pension benefits
    American Economic Journal: Applied Economics, 2011
    Co-Authors: Melvin Stephens, Takashi Unayama
    Abstract:

    Abstract Japanese public pension benefits, which were distributed quarterly through February 1990, and every other month since then, induce substantial but predictable Income fluctuations. The relative magnitude of the payments combined with the delay between payments yields a stronger test of the Life-Cycle/Permanent Income Hypothesis than in prior studies. Applying two identification strategies to monthly household panel data, we find that consumption significantly responds to quarterly benefit receipt. Additional analysis suggests that our findings cannot be explained by either liquidity constraints or precautionary savings motives. (JEL D12, D91, E21, H55)

  • the consumption response to seasonal Income evidence from japanese public pension benefits
    National Bureau of Economic Research, 2010
    Co-Authors: Melvin Stephens, Takashi Unayama
    Abstract:

    Japanese public pension benefits, which were distributed quarterly through February 1990 and every other month since then, induce substantial but predictable Income fluctuations. The relative magnitude of the payments combined with the delay between payments yields a stronger test of the Life-Cycle/Permanent Income Hypothesis than in prior studies. Applying two identification strategies to monthly household panel data, we find that consumption significantly responds to quarterly benefit receipt. Additional analysis suggests that our findings cannot be explained by either liquidity constraints or precautionary savings motives.

Masao Ogaki - One of the best experts on this subject based on the ideXlab platform.