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Birth, Death, and Consumption: Overlapping Generations and the Random Walk Hypothesis

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  • William Smith

Abstract

This paper studies the time-series behavior of consumption in a model that incorporates birth, death, and a precautionary motive for saving. Consumption of an individual agent is a random walk. However, aggregate consumption is a random walk if and only if the sum of the death rate and population growth rate is zero. Failure of the random walk hypothesis should not be attributed to finite horizons perse, but rather to inter-generational transfers caused by birth and death. Unlike certainty-equivalent models, the expected growth of consumption depends on financial wealth, rather than wage income or human capital. [D91, E21]

Suggested Citation

  • William Smith, 1998. "Birth, Death, and Consumption: Overlapping Generations and the Random Walk Hypothesis," International Economic Journal, Taylor & Francis Journals, vol. 12(4), pages 105-116.
    • Handle: RePEc:taf:intecj:v:12:y:1998:i:4:p:105-116
    DOI: 10.1080/10168739800000024
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