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

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.

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

Quantitative Economics ◽

10.3982/qe657 ◽

2019 ◽

Vol 10 (4) ◽

pp. 1357-1399 ◽

Cited By ~ 3

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.

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

Macroeconomic Dynamics ◽

10.1017/s1365100510000180 ◽

2011 ◽

Vol 15 (5) ◽

pp. 725-770 ◽

Cited By ~ 132

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.

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Wealth and Consumption After Job Displacement

Macroeconomic Dynamics ◽

10.1017/s1365100521000602 ◽

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.

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The Life-Cycle Model of Consumption and Saving

The Journal of Economic Perspectives ◽

10.1257/jep.15.3.3 ◽

2001 ◽

Vol 15 (3) ◽

pp. 3-22 ◽

Cited By ~ 263

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.

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