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...

The Great Recession confirmed a bedrock principle of modern consumption theory: It is impossible to explain aggregate spending behavior without knowledge of the underlying microeconomic distribution of circumstances and choices across households. National accounting frameworks therefore need to...

"Buffer-stock" models of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of such models, including the existence of a target wealth ratio and the proposition that aggregate consumption growth equals...