An Approximate Consumption Function
43 Pages Posted: 28 Aug 2008 Last revised: 13 Jan 2014
Date Written: August 27, 2008
Abstract
This paper proposes an approximation to the consumption function in the buffer-stock model. The approximation is based on the analytic properties of the consumption function in the buffer-stock model. In such model, the consumption function is increasing and concave and its derivative is bounded from above and below. We compare the approximation with the consumption function obtained using the endogenous grid point algorithm and show that using the former or the latter for estimating the Euler equation leads to very similar results.
Keywords: Buffer stock model of saving, Computational methods, Approximation methods and estimation
JEL Classification: C63, D12, E21
Suggested Citation: Suggested Citation
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