DP2345 Consumption Over the Life-Cycle

Author(s): Pierre-Olivier Gourinchas , Jonathan A Parker

Publication Date: January 2000

Keyword(s): Buffer Stocks , Life Cycle , Precautionary Savings , Simulated Moments

JEL(s): C61 , D91 , E21

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2345.asp

This paper employs cohort technique 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. Using these profiles, we estimate a structural model of optimal life-cycle consumption expenditures in the presence of realistic labour income uncertainty. The model fits the profiles quite well. In addition to providing tight estimates of the discount rate and risk aversion, we find that consumer behaviour changes strikingly over the life-cycle. Young consumers behave as buffer-stock agents. Around the age of 40, the typical household starts accumulating liquid assets for retirement and its behaviour mimics more closely that of a certainty equivalent consumer. This change in behaviour is mostly driven by the life-cycle profile of expected income. Our methodology provides a natural decomposition of saving into its precautionary and retirement components.