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Consumption

In: Handbook of Macroeconomics

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  • Attanasio, Orazio P.

Abstract

Consumption is the largest component of GDP. Since the 1950s, the life cycle and the permanent income models have constituted the main analytical tools to the study of consumption behaviour, both at the micro and at the aggregate level. Since the late 1970s the literature has focused on versions of the model that incorporate the hypothesis of Rational Expectations and a rigorous treatment of uncertainty. In this chapter, I survey the most recent contribution and assess where the life cycle model stands. My reading of the evidence and of recent developments leads me to stress two points: (i) the model can only be tested and estimated using a flexible specification of preferences and individual level data; (ii) it is possible to construct versions of the model that are not rejected by the data. One of the main problems of the approach used in the literature to estimate preferences is the lack of a 'consumption function'. A challenge for future research is to use preference parameter estimates to construct such functions.

Suggested Citation

  • Attanasio, Orazio P., 1999. "Consumption," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 11, pages 741-812, Elsevier.
    • Handle: RePEc:eee:macchp:1-11
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    Citations

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    Cited by:

    1. tom krebs, 2004. "welfare cost of business cycles when markets are incomplete," Econometric Society 2004 North American Summer Meetings 283, Econometric Society.
    2. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
    3. Barigozzi, Matteo & Alessi, Lucia & Capasso, Marco & Fagiolo, Giorgio, 2012. "The distribution of household consumption-expenditure budget shares," Structural Change and Economic Dynamics, Elsevier, vol. 23(1), pages 69-91.
    4. Monica Paiella & Andrea Tiseno, 2004. "Stock market optimism and participation cost: a mean-variance estimation," Econometric Society 2004 Latin American Meetings 239, Econometric Society.
    5. Fang Yang, 2005. "Consumption Along the Life Cycle: How Different is Housing?," 2005 Meeting Papers 718, Society for Economic Dynamics.
    6. Peltonen, Tuomas A. & Sousa, Ricardo M. & Vansteenkiste, Isabel S., 2012. "Wealth effects in emerging market economies," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 155-166.
    7. Monica Paiella & Andrea Tiseno, 2004. "Stock market optimism and participation cost: a mean-variance estimation," Econometric Society 2004 Latin American Meetings 239, Econometric Society.
    8. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2001. "How Important Are Idiosyncratic Shocks? Evidence from Labor Supply," American Economic Review, American Economic Association, vol. 91(2), pages 413-417, May.
    9. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 451-478, October.
    10. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    11. Raquel Carrasco & José M. Labeaga & J. David López-Salido, 2005. "Consumption and Habits: Evidence from Panel Data," Economic Journal, Royal Economic Society, vol. 115(500), pages 144-165, January.
    12. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.
    13. Andrew Benito, 2002. "Does Job Insecurity Affect Household Consumption?," Working Papers 0225, Banco de España.
    14. John Creedy & Cath Sleeman, 2005. "Adult equivalence scales, inequality and poverty," New Zealand Economic Papers, Taylor & Francis Journals, vol. 39(1), pages 51-81.
    15. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
    16. Matteo Barigozzi & Lucia Alessi & Marco Capasso & Giorgio Fagiolo, 2008. "The Distribution of Consumption-Expenditure Budget Shares. Evidence from Italian Households," Papers on Economics and Evolution 2008-09, Philipps University Marburg, Department of Geography.
    17. Andrea Butelmann & Francisco Gallego, 2001. "Household Saving in Chile (1988 and 1997): Testing the Life Cycle Hypothesis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 38(113), pages 3-48.
    18. Christopher House & John Laitner & Dmitriy Stolyarov, 2006. "Home Production by Dual Earner Couples and Consumption During Retirement," Working Papers wp143, University of Michigan, Michigan Retirement Research Center.
    19. Sebastian Barnes & Garry Young, 2003. "The rise in US household debt: assessing its causes and sustainability," Bank of England working papers 206, Bank of England.
    20. Raquel Carrasco & Jose M. Labeaga & J.David López-Salido, 2002. "Unobserved Heterogeneity and Intertemporal Nonseparability: Evidence from Consumption Panel Data," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C4-4, International Conferences on Panel Data.
    21. Tom Krebs, 2007. "Job Displacement Risk and the Cost of Business Cycles," American Economic Review, American Economic Association, vol. 97(3), pages 664-686, June.

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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