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Robust consumption policy with the desire for wealth accumulation

Author

Listed:
  • Yuanping Wang

    (Shanxi University of Finance and Economics)

  • Yingjie Niu

    (Shanghai University)

  • Siwen Gong

    (Shanghai University of Finance and Economics)

Abstract

We study the optimal consumption-saving problem for consumers who are ambiguous about labor income shocks and have a preference for (absolute) wealth. It is shown that the preference for wealth interacts with the degree of ambiguity in non-trivial ways in determining the optimal consumption. The model predicts that ambiguity and preference for wealth can produce substitution or complementarity effects on consumption. In addition, we find that the interactions of ambiguity and desire for wealth generate different implications for MPCs. We then show that these interactions significantly influence the contribution of ambiguity to excess sensitivity of consumption growth and the contribution of preference for wealth to excess smoothness of consumption.

Suggested Citation

  • Yuanping Wang & Yingjie Niu & Siwen Gong, 2022. "Robust consumption policy with the desire for wealth accumulation," Review of Economics of the Household, Springer, vol. 20(3), pages 993-1025, September.
    • Handle: RePEc:kap:reveho:v:20:y:2022:i:3:d:10.1007_s11150-021-09551-0
    DOI: 10.1007/s11150-021-09551-0
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