TY - JOUR
T1 - The effect of interest rates on consumption in an income fluctuation problem
AU - Lehrer, Ehud
AU - Light, Bar
N1 - Publisher Copyright:
© 2018 Elsevier B.V.
PY - 2018/9
Y1 - 2018/9
N2 - We examine the effect of a change in interest rates on an agent's consumption and savings decisions when her income is fluctuating. In each period, a long-lived agent decides how much to save (i.e., invest in a risky bond) and how much to consume while her income and the rate of return on her savings are uncertain and depend on the state of the economy. We show that under the concavity of the consumption function, a condition that ensures that the substitution effect dominates the income effect, lower interest rates encourage the agent's consumption across all states.
AB - We examine the effect of a change in interest rates on an agent's consumption and savings decisions when her income is fluctuating. In each period, a long-lived agent decides how much to save (i.e., invest in a risky bond) and how much to consume while her income and the rate of return on her savings are uncertain and depend on the state of the economy. We show that under the concavity of the consumption function, a condition that ensures that the substitution effect dominates the income effect, lower interest rates encourage the agent's consumption across all states.
KW - Consumption
KW - Dynamics
KW - Income fluctuation problem
KW - Interest rates
KW - Savings
UR - http://www.scopus.com/inward/record.url?scp=85050916663&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2018.07.004
DO - 10.1016/j.jedc.2018.07.004
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AN - SCOPUS:85050916663
VL - 94
SP - 63
EP - 71
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
ER -