TY  - JOUR
AU  - Carroll,Christopher D.
TI  - Precautionary Saving and the Marginal Propensity to Consume out of Permanent Income
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8233
PY  - 2001
Y2  - April 2001
UR  - http://www.nber.org/papers/w8233
L1  - http://www.nber.org/papers/w8233.pdf
N1  - Author contact info:
Christopher D. Carroll
Department of Economics
Mergenthaler 440
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7602
Fax: 410/516-7600
E-Mail: ccarroll@jhu.edu
AB  - The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving.
ER  -