We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive,...

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...

This paper tests a straightforward implication of the basic life cycle model of consumption: that current consumption depends on expected lifetime income. The paper projects future income for a panel of households and finds that consumption is closely related to projected current income but...

This paper argues that the typical household's saving is better described by a 'buffer-stock' version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently...

We examine the dynamics of two endogenous-growth models in which agents have comparison utility. In the inward-looking economy, individuals care about how their current consumption compares with their own past consumption. In the outward-looking economy, they care about how their own consumption...

This paper considers several alternative explanations for the fact that households with higher levels of lifetime income have higher lifetime saving rates (Dynan Skinner and Zeldes (1996); Lillard and Karoly (1997)) The paper argues that the saving behavior or the richest households cannot be...

This paper provides derivations necessary for solving an optimal consumption problem with multiplicative habits and a CRRA 'outer' utility function either for a microeconomic problem with both labor income risk and rate-of-return risk or for a macroeoconomic representative agent model

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...

The standard approach to modelling consumption/saving problems is to assume that the decisionmaker is solving a dynamic stochastic optimization problem However under realistic descriptions of utility and uncertainty the optimal consumption/saving decision is so difficult that only recently...