Buffer stock savings in a New-Keynesian business cycle model

Katrin Rabitsch and Christian Schoder

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: We introduce the tractable buffer stock savings setup of Carroll (2009 NBER Working Paper) into an otherwise conventional New-Keynesian dynamic stochastic general equilibrium model with financial frictions. The introduction of a precautionary saving motive arising from an uninsurable risk of permanent income loss, affects the model's properties in a number of interesting ways: it produces a more hump-shaped reaction of consumption in response to both supply (technology) and demand (monetary) shocks, and more pronounced reactions in response to demand shocks. Adoption of the buffer stock savings setup thus offers a more microfounded way, compared to, e.g., habit preferences in consumption, to introduce Keynesian features into the model, serving as a device to curbing excessive consumption smoothing, and to attributing a higher role to demand driven fluctuations. We also discuss steady state effects, determinacy properties as well as other practical issues.

Keywords: precautionary saving; buffer stock saving; dynamic stochastic general equilibrium model (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Working Paper: Buffer stock savings in a New-Keynesian business cycle model (2016)
Working Paper: Buffer stock savings in a New-Keynesian business cycle model (2016)
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