Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior. This paper provides the analytical basis for those...

Using data from the Health and Retirement Study, this paper creates variables measuring knowledge about future social security and pension benefits by comparing respondent reports of their expected benefits with benefits calculated from social security earnings records and employer provided...

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...

In the past two decades the widely reported personal saving rate in the United States has dropped from double digits to below zero. First, we attempt to account for the decline in the National Income and Product Accounts (NIPA) saving rate. The macroeconomic literature suggests that about half...

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...