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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Mertens, Karel

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Kambourov, Gueorgui / Lambertini, Luisa / Pavoni, Nicola / Ruhl, Kim / Nimark, Kristoffer / Wang, Pengfei

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The Buffer-Stock Consumption Model with Endogenous Income Shifts

Nikolaj Malchow-Møller1 / Bo Jellesmark Thorsen2

1Centre for Economic and Business Research (CEBR) and University of Southern Denmark,

2Royal Veterinary and Agricultural University and Centre for Economic and Business Research (CEBR),

Citation Information: Contributions in Macroeconomics. Volume 5, Issue 1, ISSN (Online) 1534-6005, DOI: https://doi.org/10.2202/1534-6005.1108, June 2005

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Credit-constrained households must use savings both to smooth consumption and to finance productive investments. This non-separability between consumption and production decisions is ignored in the standard intertemporal buffer-stock consumption model where income growth is exogenous. This paper develops an intertemporal model of household consumption and investment in the presence of credit constraints and income uncertainty. Investment options are modelled as irreversible, indivisible, and non-stationary, allowing for endogenous income growth. The resulting behaviour is markedly different from that of the standard buffer-stock model.

Keywords: Credit constraints; buffer-stock saving; endogenous growth; indivisible and irreversible investments; uncertainty

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