A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version) / Christopher D. Carroll.

Format:

Book

Author/Creator:

Carroll, Christopher D.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8387.

NBER working paper series no. w8387

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Theory of the Consumption Function, With and Without Liquidity Constraints

A Theory of the Consumption Function, With and Without Liquidity Constraints

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

This paper argues that the modern stochastic consumption model, in which impatient consumers face uninsurable labor income risk, matches Milton Friedman's (1957) original description of the Permanent Income Hypothesis much better than the perfect foresight or certainty equivalent models did. The model can explain the high marginal propensity to consume, the high discount rate on future income, and the important role for precautionary behavior that were all part of Friedman's original framework. The paper also explains the relationship of these questions to the Euler equation literature, and argues that the effects of precautionary saving and liquidity constraints are often virtually indistinguishable.

Notes:

Print version record

July 2001.