Theoretical foundations of buffer stock saving

"Buffer-stock" models of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of such models, including the existence of a target wealth ratio and the proposition that aggregate consumption growth equals aggregate income growth in a small open economy populated by buffer stock savers. -- Precautionary Saving ; Buffer Stock Saving ; Marginal Propensity to Consume ; Permanent Income Hypothesis