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Buffer stock savings in a New-Keynesian business cycle model

Rabitsch, Katrin and 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, Vienna.

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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)

Item Type: Paper
Keywords: precautionary saving / buffer stock saving / dynamic stochastic general equilibrium model
Classification Codes: JEL D91, E21
Divisions: Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 25 Aug 2016 15:13
Last Modified: 25 Aug 2016 15:13
URI: http://epub.wu.ac.at/id/eprint/5158


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