Dynamic Consumption Theory

Fabio-Cesare Bagliano and Giuseppe Bertola

in Models for Dynamic Macroeconomics

Published in print February 2004 | ISBN: 9780199266821
Published online January 2005 | e-ISBN: 9780191601606 | DOI:
Dynamic Consumption Theory

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Solves the basic version of the intertemporal consumption choice model under rational expectations. Discrete‐time dynamic optimization techniques are introduced and the theoretical relationships between the dynamics of permanent income, current income, consumption, and saving are derived. Empirical tests are presented and extensions including a precautionary saving motive and optimal portfolio allocation decisions are discussed. The Appendix summarizes dynamic programming techniques applied to the optimal consumption choice.

Keywords: dynamic programming; intertemporal choice; permanent income; portfolio allocation; precautionary saving; rational expectations

Chapter.  21161 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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