2018SpringUN3213Lecture09ConsumptionSavingsII.pdf

2018SpringUN3213Lecture09ConsumptionSavingsII.pdf -...

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Intermediate Macroeconomics Economics UN3213 Professor: Jón Steinsson Lecture 9 1
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Announcements Readings: Today: Jones ch 3, Levitt-Dubner, Mankiw, Thompson, Dell’Antonia, Hodgekiss. Thursday: Steinsson (2017): “Malthus and Pre-Industrial Stagnation” 2
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Consumption-Savings Consumption Euler Equation: ࠵ై࠵? ࠵శ࠵? 1 = ࠵໽࠵? 1 + ࠵౅࠵? ࠵ై࠵? ࠵శ࠵? 2 Marginal benefit of saving an extra dollar equal to marginal cost With ࠵ై࠵? ࠵శ࠵? = log ࠵శ࠵? : ࠵శ࠵? 2 ࠵శ࠵? 1 = ࠵໽࠵? 1 + ࠵౅࠵? Consumption growth unrelated to income growth Determined by interest rate and discount factor 3
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Consumption-Savings Level of consumption if Robinson Crusoe lives for two periods: ࠵శ࠵? 1 = 1 1 + ࠵໽࠵? ࠵ౌ࠵? 1 + 1 1 + ࠵౅࠵? ࠵ౌ࠵? 2 Consumption at time ࠵ౡ࠵? is a fraction of the present value of life-time income Consumption at time ࠵ౡ࠵? only depends on current income in so far as it affects the present value of life-time income 4
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Does the Model Fit the Data? 5 Gourinchas and Parker (2002)
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Does the Model Fit the Data? No What does it miss? Model implies a constant growth rate of consumption (Euler equation) Data show a hump shaped pattern of consumption over the life cycle Consumption profile seems to mimic income profile, while model says it shouldn’t 6
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What Is Wrong with the Model? People are not forward looking? Well, they do save for retirement People’s preferences change over time? Need more consumption when have young children (Gourinchas-Parker try to take this into account) People can’t borrow against future income? Young people want to build up buffer stock of savings (“rainy day fund”)? 7
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Borrowing Constraints Suppose Robinson Crusoe: Starts with no wealth Has hump-shaped income profile estimated by Gourinchas and Parker (2002) No uncertainty about income Can’t borrow How should Robinson Crusoe behave? 8
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Borrowing Constraints 1. Live “hand-to-mouth” while current income is less than “permanent income”, i.e., while ࠵ౌ࠵? ࠵ౡ࠵? < 1 ࠵ఽ࠵? ࠵౗࠵?=0 ࠵ఽ࠵?−1 1 1 + ࠵౅࠵? ࠵౗࠵? ࠵ౌ࠵? ࠵ౡ࠵?+࠵౗࠵? Where ࠵ఽ࠵? is the remaining number of periods of life Here RHS is what consumption would be absent borrowing constraints 2. Behave as before once condition above doesn’t hold any more (once borrowing constraint doesn’t bind) 9
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Consumer Credit In reality, some borrowing is possible What are the main forms of consumer credit? Mortgages, auto loans, student loans, consumer durables on installments, credit card debt Two types: Secured credit: Loans backed by collateral that can be seized by creditor in event of non-payment.
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