DP4474 The Buffer-Stock Model and the Aggregate Propensity to Consume: A Panel-Data Study of the US States

Author(s): Maria Jose Luengo-Prado, Bent E Sørensen
Publication Date: July 2004
Keyword(s): buffer-stock, consumption, precautionary saving
JEL(s): E21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4474

We simulate a buffer-stock model of consumption, explicitly aggregate over consumers, and estimate aggregate marginal propensities to consume out of current and lagged income using simulated data generated by the model. We calculate the predicted marginal effects of changing persistence of income shocks, aggregate-level uncertainty, and individual-level risk. Next, we estimate marginal propensities for US states using panel-data methods. We find effects of persistence that clearly correspond to the predictions of the model and while the effect of aggregate uncertainty cannot be determined precisely, indicators of individual level uncertainty have strong effects consistent with the model. Overall, the buffer-stock model clearly helps explain differences in consumer behaviour across states.