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Buffer stock savings in a New-Keynesian business cycle model

Author

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  • Rabitsch, Katrin
  • Schoder, Christian
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. (authors' abstract)

Suggested Citation

  • Rabitsch, Katrin & Schoder, Christian, 2016. "Buffer stock savings in a New-Keynesian business cycle model," Department of Economics Working Paper Series 231, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:5158
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    References listed on IDEAS

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    Cited by:

    1. Schoder, Christian, 2017. "Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 46-63.

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    More about this item

    Keywords

    precautionary saving; buffer stock saving; dynamic stochastic general equilibrium model;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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