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Consumption Over the Life Cycle
Author(s) -
Gourinchas PierreOlivier,
Parker Jonathan A.
Publication year - 2002
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/1468-0262.00269
Subject(s) - economics , consumption (sociology) , life cycle hypothesis , econometrics , stock (firearms) , consumer expenditure survey , construct (python library) , precautionary savings , microeconomics , public economics , monetary economics , macroeconomics , computer science , engineering , social science , sociology , mechanical engineering , aggregate expenditure , market liquidity , programming language
This paper estimates a structural model of optimal life‐cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age‐profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life cycle. Young consumers behave as buffer‐stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life‐cycle components.