1997/02/01 by C. D. Carroll, Christopher D. Carroll · 29 citations
Economics, Econometrics and Finance · #Buffer stock scheme #Consumption (sociology) #Econometrics #Economic theories and models #Economics #Fiscal Policy and Economic Growth #Housing Market and Economics #Labour economics #Life-cycle hypothesis #Macroeconomics #Marginal propensity to consume #Microeconomics #Monetary economics #Permanent income hypothesis #Stock (firearms)
paper · doi:10.1162/003355397555109
published in The Quarterly Journal of Economics 112(1), 1-55 (Oxford University Press)
openalex publication_date 1997/02/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/15
This paper argues that the typical household's saving is better described by a “buffer-stock” 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” documented by Carroll and Summers; the “consumption/income divergence” first documented in the 1930s; and the stability of the household age/wealth profile over time despite the unpredictability of idiosyncratic wealth changes.