We analyze how commodity price variability affects saving behavior in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles attitudes towards risk and attitudes towards intertemporal substitution. We show that the effect of price variability...

In this paper household level data are used to explore whether unemployment risk is an important factor in the timing of consumers' durable goods purchase decisions. A theoretical model is presented in which both income uncertainty and household debt play a direct role, offering a potential...

Since the 1950s, the lifecycle hypothesis has been the dominant explanation for the ‘inverse U’ in household wealth accumulation. This paper advances an alternative explanation, rooted in the ideas of Veblen, that emphasises the role of lifestyle conformity: Because people tend to adopt...

Standard models of intertemporal utility maximization assume that agents discount future utility flows at a constant rate — exponential discounting. Euler equations estimated over different time horizons should have equal discount rates. They do not. Rising term yield premia imply discount...

This paper investigates the effects of ("keeping up with the Joneses" and "learning-by-investing") externalities, when labor productivity decreases with age. Within the framework of a continuous time overlapping generations model, the effects of the consumption externality on the propensity to...

This paper models the effect of a HIV/AIDS epidemic on saving behavior and studies the welfare effects of testing for HIV. The model specifies a utility function that includes both regular consumption, and medical expenditures. Medical expenditures generate more utility if individuals are HIV...

In this paper we examine how social interactions affect consumption decisions at various levels of aggregation in a life-cycle economy made up of peer groups. For this purpose, we consider two analytically solvable life-cycle models, one under certainty equivalent behavior and one under...

Prudence is widely known for inducing precautionary saving behavior. This paper revisits this important implication by introducing the notions of first-order and second-order prudence. Within smooth expected utility (EU), prudence is second-order. In that case, the presence of a small,...

We consider a class of additively time-separable life-cycle consumption-savings models with iso-elastic per period power utility featuring resistance to inter-temporal substitution of θ with linear consumption policy functions. The utility maximization problem is dynamically inconsistent for...

Financial advisers often recommend that investors should place (100 − age) % of their wealth in a well-diversified equity portfolio. Another popular approach is based on the complete markets model with CRRA utility and i.i.d. returns which implies a constant portfolio share invested in stocks....