Theoretical Foundations of Buffer Stock Saving
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NBER Working Paper No. 10867
Issued in November 2004
NBER Program(s): EFG
"Buffer-stock" versions of the dynamic stochastic optimizing model of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main characteristics of buffer stock models, including the existence of a target level of wealth and the proposition that aggregate consumption growth equals aggregate income growth in a small open economy populated by buffer stock consumers.
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