CONSUMPTION PUZZLES AND PRECAUTIONARY SAVINGS

When marginal utility is convex, agents accumulate savings as a precautionary measure against labor-income eventualities. This paper shows that precautionary savings can go a long way in making the excess-growth, excess-smoothness and excess-sensitivity features of consumption consistent with the stochastic processes of labor income observed in the U.S. at the microeconomic level. © 1990.