Buffer-Stock Saving and the Marginal Propensity for Consumption from Human Wealth in Iran

Document Type : Research Paper


Faculty of Economics, University of Tehran, Tehran, Iran



This study presents a Buffer-Stock version of the Life Cycle Permanent Income Hypothesis (LC/PIH) model calibrated to incorporate microeconomic evidence on the income dynamics of Iranian households. The results show that the predictions of the buffer-stock version of LC/PIH predictions are consistent with the consumption/income profile of Iranians and the extensive microeconomic evidence indicating that the marginal propensity to consume (MPC) from human wealth is lower than the 0.02 implied by standard microeconomic models. This paper also shows that the buffer-stock version of the LC/PIH model can explain why consumption in Iran does not closely follow income and differs from income at the household level. It also explains why the ratio of household wealth to permanent income in Iran is low and has remained stable despite a sharp slowdown in the expected income growth rate due to global economic sanctions on Iran.


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