Using MS Excel to Solve and Simulate the Life-Cycle/Permanent-Income Model of Consumption and Saving

The objective of this manuscript is to provide a simple guide to instructors and students on how to solve and simulate a discrete-time specification of the Life-Cycle/Permanent-Income Model of Consumption and Saving (LCPI Model) using only algebra and basic calculus. The solution and simulation procedure makes use of the simple computing environment in MS Excel. Understanding this process will enable students to operate and experiment with one of the preeminent models that is used in modern economic analysis. The dynamic LCPI Model in this manuscript includes a social security program to demonstrate some relevant applications of the solution technique and methods