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Consumption over the Life Cycle and over the Business Cycle

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  • Attanasio, Orazio P
  • Browning, Martin

Abstract

The authors assess the empirical validity of the life-cycle model using a time series of cross sections and a novel parametrization of preferences. The main findings are as follows: the excess sensitivity of consumption growth to labor income disappears when the authors control for demographic variables; the elasticity of intertemporal substitution (EIS) is a function of several variables, including the level of consumption, and the EIS increases with the level of consumption; and the variables that change the EIS are also important in explaining excess sensitivity over the business cycle. The authors are able to reconcile their results with those in the macro and micro literature. Copyright 1995 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 85 (1995)
Issue (Month): 5 (December)
Pages: 1118-37

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Handle: RePEc:aea:aecrev:v:85:y:1995:i:5:p:1118-37

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  1. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
  2. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
  3. Robert E. Hall & Frederic S. Mishkin, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  4. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  5. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1986. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  6. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, octubre-d.
  7. Joseph G. Altonji & Aloysius Siow, 1986. "Testing the Response of Consumption to Income Changes with (Noisy) PanelData," NBER Working Papers 2012, National Bureau of Economic Research, Inc.
  8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  9. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  10. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-97, June.
  11. Christopher D. Carroll & Lawrence H. Summers, 1991. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Chapters, in: National Saving and Economic Performance, pages 305-348 National Bureau of Economic Research, Inc.
  12. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  13. Blinder, Alan S, 1975. "Distribution Effects and the Aggregate Consumption Function," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 447-75, June.
  14. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  15. John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
  16. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  17. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  18. White, Betsy Buttrill, 1978. "Empirical Tests of the Life Cycle Hypothesis," American Economic Review, American Economic Association, vol. 68(4), pages 547-60, September.
  19. Blundell, R. & Browning, M. & Meghir, C., 1989. "A Microeconometric Model Of Intertemporal Substitution And Consumer Demand," The Warwick Economics Research Paper Series (TWERPS) 324, University of Warwick, Department of Economics.
  20. Stoker, Thomas M, 1984. "Completeness, Distribution Restrictions, and the Form of Aggregate Functions," Econometrica, Econometric Society, vol. 52(4), pages 887-907, July.
  21. Browning, Martin, 1993. "Estimating micro parameters from macro data alone: some pessimistic evidence," Ricerche Economiche, Elsevier, vol. 47(3), pages 253-267, September.
  22. Martin J. Browning, 1989. "The Intertemporal Allocation of Expenditure on Non-durables, Services, and Durables," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 22-36, February.
  23. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
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