Optimal Savings under Transition Uncertainty and Learning Dynamics

This paper studies optimal consumption and saving decisions under uncertainty about the transition dynamics of the economic environment. We consider a general optimal savings problem in which the exogenous state governing discounting, capital returns, and nonfinancial income follows a Markov process with unknown transition probability, and agents update their beliefs over time through Bayesian learning. Despite the added endogenous state from belief updating, we establish the existence, uniqueness, and key structural properties of the optimal policy, including monotonicity and concavity. We also develop an efficient computational method and use it to study how transition uncertainty and learning interact with precautionary motives and wealth accumulation, highlighting a dynamic mechanism through which uncertainty about regime persistence shapes consumption dynamics and long-run household wealth.

Source: arXiv:2603.08663v1 - http://arxiv.org/abs/2603.08663v1 PDF: https://arxiv.org/pdf/2603.08663v1 Original Link: http://arxiv.org/abs/2603.08663v1