An Exact Analysis of Precautionary Consumption Growth

Jeanne Commault (1)

1 ECON - Département d'économie (Sciences Po)

While macro models increasingly incorporate substantial risk, the theoretical knowledge about the effect of uncertainty on consumption growth consists of intuitions from the second order log-linearized Euler equation. I show that the derivation of the log-linearized Euler equation is flawed in that it does not consist in linearizing an Euler equation but in linearizing an ad-hoc mathematical identity. I prove exactly that uncertainty raises consumption growth and makes consumption depart from a random walk. I also prove that this precautionary consumption growth is decreasing in assets, and in transitory and permanent income when income is a transitory-permanent process.

Mots clés: Precautionary behavior; Log-linearized Euler equation; Random walk hypothesis

Domaines: Economies et finances

Jeanne Commault. An Exact Analysis of Precautionary Consumption Growth. 2022. ⟨halshs-03591010⟩