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Models for Dynamic Macroeconomics$
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Fabio-Cesare Bagliano and Giuseppe Bertola

Print publication date: 2004

Print ISBN-13: 9780199266821

Published to Oxford Scholarship Online: January 2005

DOI: 10.1093/0199266824.001.0001

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Dynamic Consumption Theory

Dynamic Consumption Theory

Chapter:
(p.1) 1 Dynamic Consumption Theory
Source:
Models for Dynamic Macroeconomics
Author(s):

Fabio-Cesare Bagliano (Contributor Webpage)

Giuseppe Bertola

Publisher:
Oxford University Press
DOI:10.1093/0199266824.003.0001

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

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