CONSUMPTION AND SAVING OVER THE LIFE CYCLE: HOW IMPORTANT ARE CONSUMER DURABLES?

2011 ◽  
Vol 15 (5) ◽  
pp. 725-770 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Dirk Krueger
Keyword(s):  
Life Cycle ◽  
Borrowing Constraints ◽  
Financial Assets ◽  
Cycle Model ◽  
Consumer Durables ◽  
Nondurable Goods ◽  
Consumption Expenditures ◽  
Order Of Magnitude ◽  
Consumption And Saving ◽  
Standard Life

In this paper we investigate whether a standard life-cycle model in which households purchase nondurable consumption and consumer durables and face idiosyncratic income and mortality risk as well as endogenous borrowing constraints can account for two key patterns of consumption and asset holdings over the life cycle. First, consumption expenditures on both durable and nondurable goods are hump-shaped. Second, young households keep very few liquid assets and hold most of their wealth in consumer durables. In our model durables play a dual role: they both provide consumption services and act as collateral for loans. A plausibly parameterized version of the model predicts that the interaction of consumer durables and endogenous borrowing constraints induces durables accumulation early in life and higher consumption of nondurables and accumulation of financial assets later in the life cycle, of an order of magnitude consistent with observed data.

scholarly journals Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy

2010 ◽  
Vol 48 (3) ◽  
pp. 693-751 ◽  
Author(s):  
Orazio P Attanasio ◽  
Guglielmo Weber
Keyword(s):  
Public Policy ◽  
Life Cycle ◽  
Point Of View ◽  
Theoretical Point ◽  
Critical Survey ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Intertemporal Allocation ◽  
Consumption And Saving ◽  
Standard Life

This paper provides a critical survey of the large literature on the life cycle model of consumption, both from an empirical and a theoretical point of view. It discusses several approaches that have been taken in the literature to bring the model to the data, their empirical successes, and their failures. Finally, the paper reviews a number of changes to the standard life cycle model that could help solve the remaining empirical puzzles.

scholarly journals A historical welfare analysis of Social Security: Whom did the program benefit?

10.3982/qe657 ◽  
2019 ◽  
Vol 10 (4) ◽  
pp. 1357-1399 ◽  
Author(s):  
William B. Peterman ◽  
Kamila Sommer
Keyword(s):  
Life Cycle ◽  
Steady State ◽  
Social Security ◽  
Welfare Effects ◽  
Welfare Effect ◽  
Life Cycle Model ◽  
Cycle Model ◽  
The Great Depression ◽  
Standard Life ◽  
Program Benefit

A well‐established result in the literature is that Social Security reduces steady state welfare in a standard life cycle model. However, less is known about the historical quantitative effects of the program on agents who were alive when the program was adopted. In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security generally improved these cohorts' welfare, in part because these cohorts received far more benefits relative to their contributions than they would have received if they lived their entire life in the steady state with Social Security. Moreover, the negative general equilibrium welfare effect of Social Security associated with capital crowd‐out was reduced during the transition, because it took many periods for agents to adjust their savings levels in response to the program's adoption. The positive welfare effect experienced by these transitional agents offers one explanation for why the program that may reduce welfare in the steady state was originally adopted.

Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model?

2014 ◽  
Vol 6 (1) ◽  
pp. 162-189 ◽  
Author(s):  
Jonathan Huntley ◽  
Valentina Michelangeli
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Precautionary Savings ◽  
Financial Assets ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Marginal Propensity To Consume ◽  
Tax Returns ◽  
Marginal Propensity ◽  
Earnings Risk

We build a life-cycle model with earnings risk, liquidity constraints, and portfolio choice over tax-deferred and taxable assets to evaluate how household consumption changes in response to shocks to transitory anticipated income, such as the 2001 income tax rebate. Households optimally invest in tax-deferred assets, which are encumbered by withdrawal penalties, and exchange taxable precautionary savings for higher after-tax returns. The model predicts a higher marginal propensity to consume out of a rebate than is predicted by a standard frictionless life-cycle model. Liquidity-constrained households—with few financial assets or portfolios expensive to reallocate—consume a higher fraction of the rebates. (JEL D91, E21, G11, H24)

Wealth and Consumption After Job Displacement

2021 ◽  
pp. 1-29
Author(s):  
Justin Barnette
Keyword(s):  
Life Cycle ◽  
Panel Study ◽  
Job Displacement ◽  
Income Dynamics ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Large Drop ◽  
Long Run ◽  
The Usa ◽  
Standard Life

Abstract Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long run wealth in the USA. Upon displacement, wealth falls 14% relative to workers of the same age and similar education from the Panel Study of Income Dynamics (PSID). Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is small and statistically insignificant changes to consumption in the PSID whereas agents in the model decrease their consumption considerably. Extending the model to include habit formation reconciles some of these differences by generating similar long run effects on wealth. This allows for the examination of wealth at death through the lens of the model.

scholarly journals The Life-Cycle Model of Consumption and Saving

2001 ◽  
Vol 15 (3) ◽  
pp. 3-22 ◽  
Author(s):  
Martin Browning ◽  
Thomas F Crossley
Keyword(s):  
Life Cycle ◽  
Empirical Evidence ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Welfare Losses ◽  
Theoretical Predictions ◽  
Consumption And Saving ◽  
Life Cycle Models

A central implication of life-cycle models is that agents smooth consumption. We review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime. We find that life-cycle models--particular those which incorporate realistic features of markets and goods--have more empirical successes than failures. We also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents. Finally, we emphasize that the coherence of life-cycle models imposes an important discipline when incorporating new features into models.

Optimal onset and exhaustion of retirement savings in a life-cycle model

2010 ◽  
Vol 11 (1) ◽  
pp. 21-52 ◽  
Author(s):  
MARIE-EVE LACHANCE
Keyword(s):  
Life Cycle ◽  
Initial Period ◽  
Borrowing Constraints ◽  
Opportunity Costs ◽  
Retirement Savings ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Single Model ◽  
Power Utility ◽  
Wide Range

AbstractThis paper facilitates the exploration of optimal individual retirement savings strategies within a life-cycle framework by providing a convenient tool to implement a model suggested by Yaari (1965) with an uncertain lifetime and borrowing constraints. The solution is given both for the general case and for cases leading to closed-form equations such as power utility and Gompertz mortality. Illustrations for a wide range of parameters indicate that starting to save for retirement in the first phase of one's career is rarely optimal. Of course, this is not to say that young workers should not save for other motives – a limitation of this model is that risks besides mortality are not considered. The conclusion should also be interpreted cautiously as it is difficult to represent every possible individual circumstance and saving incentive in a single model. The intuition behind the result is that an efficient strategy allocates the burden of financing retirement first to periods with higher income (i.e. lower opportunity costs), creating the potential for an initial period without savings when income grows.

Intergenerational Redistributive Effects of Monetary Policy

2021 ◽  
Author(s):  
Marcin Bielecki ◽  
Michał Brzoza-Brzezina ◽  
Marcin Kolasa
Keyword(s):  
Monetary Policy ◽  
Life Cycle ◽  
Household Finance ◽  
Labor Income ◽  
Monetary Shocks ◽  
Financial Assets ◽  
Asset Accumulation ◽  
Cycle Model ◽  
Net Worth ◽  
Redistributive Effects

Abstract This paper investigates the distributional consequences of monetary policy across generations. We use a life-cycle model with a rich asset structure as well as nominal and real rigidities, calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. We show that the life-cycle profiles of income and asset accumulation decisions are important determinants of redistributive effects of monetary shocks. The redistribution is mainly driven by nominal assets and labor income, less by real financial assets and housing. Overall, we find that a typical monetary policy easing redistributes welfare from older to younger generations, and decreases net worth inequality associated with life-cycle motives.

Sign in / Sign up

Export Citation Format

Share Document