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The lifecycle model of consumption and saving

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  • Martin Browning

    ()
    (Institute for Fiscal Studies and Nuffield College, Oxford)

  • Thomas F. Crossley

Abstract

The life-cycle model is the standard framework which economists use to think about the intertemporal allocation of time, money and effort. The model suggests that households should `smooth' expenditures. One of the strengths of the model is that it provides a single framework which integrates allocation at many different frequencies. Accordingly, we provide an assesment of the life- cycle model by re-examining the empirical evidence for smoothing (1) within the year, (2)at year-to-year or business cycle frequencies, (3) over the working life, and (4) across the stages of life, such as working into retirement. We conclude that although unresolved challenges remain, the model has had many more successes than failures. We provide some calculations that show that where deviations from the model's predictions have been detected, they imply very small welfare costs for households. Moreover, economists are really just beginning systematic application of general theory models to microdata. Thus it is much too early to abandon the life-cycle model.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W01/15.

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Length: 39
Date of creation: May 2001
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Handle: RePEc:ifs:ifsewp:01/15

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