Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation in- creases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing âtoo muchâ liquidity.

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Golden Eggs and Hyperbolic Discounting

The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

This paper studies how the Hodrick-Prescott filter should be adjusted when changing the frequency of observations. It complements the results of Baxter and King (1999) with an analytical analysis, demonstrating that the filter parameter should be adjusted by multiplying it with the fourth power of the observation frequency ratios. This yields an HP parameter value of 6.25 for annual data given a value of 1600 for quarterly data. The relevance of the suggestion is illustrated empirically.

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On Adjusting the Hodrick-Prescott Filter for the Frequency of Observations

We model a consumer's efforts to reduce the discount on future utilities. Our analysis shows how wealth, mortality, addictions, uncertainty, and other variables affect the degree of time preference. In addition to working out many implications of the model, we discuss evidence on consumption, savings, equilibrium, and the dynamics of inequality. We claim that most ofthat evidence is consistent with the predictions of our approach.

The Endogenous Determination of Time Preference

This paper argues that the typical household's saving is better described by a buffer-stock version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient In the traditional model consumption growth is determined solely by tastes; in contract buffer-stock consumers set average consumption growth equal to average labor income growth regardless of tastes The model can explain three empirical puzzles: the consumption/income parallel of Carroll and Summers [1991]; the consumption/income divergence first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes

Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis

As I WRITE, the U.S. economy remains mired in the slowest recovery from any recession in the postwar period. Consumer confidence and consumption spending, in particular, have been exceptionally weak, and the unemployment rate has continued to rise long after many other indicators began to improve. This paper presents evidence that these facts are related, in the sense that consumer pessimism about unemployment explains a substantial part of the recent weakness in consumption. However, neither theoretical consumption models commonly used for macroeconomic research' nor standard macroeconometric forecasting models2 provide a direct role for unemployment expectations in determining current consumption.3 By contrast, this paper shows that the "buffer-stock" model of saving that has evolved from the work of Stephen Zeldes and Angus Deaton and from my previous work can imply a central role for unemployment expectations.4 In the buffer-stock model,

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The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence

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A Major Shock Makes Prices More Flexible and May Result in a Burst of Inflation or Deflation

IZA. on policy, IZA takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. of our Our key to between academic policymakers ABSTRACT Unemployment recoveries in the US have been inexorable. Between 1948 and 2019, the annual reduction in the unemployment rate during cyclical recoveries was fairly tightly distributed around 0.1 log points per year. The economy seems to have an irresistible force toward restoring full employment. In the aftermath of a recession, unless another crisis intervenes, unemployment continues to glide down. Occasionally, unemployment rises rapidly during an economic crisis, while most of the time, unemployment declines slowly and smoothly at a near-constant proportional rate. We show that similar properties hold for other measures of the US unemployment rate and for the unemployment rates of many other emerging and advanced countries. year. We document this regularity within the two main statistical approaches to business-cycle analysis and measurement: (1) construction of a chronology of turning points, and (2) estimation of a Markov regime-switching model. We also show that measures of US unemployment extended to include discouraged workers and others, not counted in the labor force, display the same

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Robert E. Hall

Papers

The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence

A Major Shock Makes Prices More Flexible and May Result in a Burst of Inflation or Deflation

The Inexorable Recoveries of Unemployment