NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Consumption and Savings with Stochastic Income

Chong Wang, Neng Wang, Jinqiang Yang

NBER Working Paper No. 19319
Issued in August 2013
NBER Program(s):   EFG

We develop an analytically tractable consumption-savings model for a liquidity-constrained agent who faces both permanent and transitory income shocks. We find that risk aversion and intertemporal substitution have very different effects on both consumption and the steady-state savings target. Moderate changes in risk aversion have large effects on consumption and buffer-stock savings. With permanent shocks, it takes many years to reach the steady-state savings target. We also find that large discrete income shocks (jumps) occurring at low frequencies can be very costly. Unlike conventional wisdom, transitory shocks can generate very large precautionary savings demand, especially for low transitory income states.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19319

Users who downloaded this paper also downloaded these:
Lusardi, Michaud, and Mitchell w18669 Optimal Financial Knowledge and Wealth Inequality
Ang, Papanikolaou, and Westerfield w19436 Portfolio Choice with Illiquid Assets
Wang, Wang, and Yang w19327 Investment, Tobin's q, and Interest Rates
Caplin and Dean w19318 Behavioral Implications of Rational Inattention with Shannon Entropy
Blume, Brock, Durlauf, and Jayaraman w19212 Linear Social Interactions Models
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us