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Consumption and Home Production over the Life Cycle

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  • Wenli Li

    (Federal Reserve Bank of Philadelphia)

  • Fang Yang

    (State University of New York at Albany)

  • Michael Dotsey

    (Federal Reserve Bank of Philadelphia)

Abstract

In this paper, we document households' time use and consumption over the life cycle. Specifically, households spend a roughly constant amount of hours doing market work and home production early in the life cycle. At age 50, they begin to reduce their market hours sharply and increase home hours. Households' expenditure on goods bought from the market for consumption, goods bought for home production, and housing services all exhibit hump shapes as they age, with the market good having the most pronounced hump, followed by the home good, and then housing services. We then incorporate home production in a dynamic stochastic general equilibrium model of consumption and savings with illiquid housing and collateralized borrowing constraint. We show that a plausibly parameterized version of the model explains the observed patterns. In particular, the model predicts that the interaction of the labor efficiency profile and home production explains largely households' time use over the life cycle. The resulting income profiles as well as the endogenous borrowing constraint account for the initial humps in all three consumption goods. The consumption profiles in the second half of the life cycle are mostly driven by the complementarity of home hours, home good, and housing in home production.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 423.

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Date of creation: 2010
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Handle: RePEc:red:sed010:423

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  1. Bils, Mark & Chang, Yongsung & Kim, Sun-Bin, 2012. "Comparative advantage and unemployment," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 150-165.
  2. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," 2006 Meeting Papers 46, Society for Economic Dynamics.
  3. Paul Gomme & Finn E. Kydland & Peter Rupert, 2001. "Home Production Meets Time to Build," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1115-1131, October.
  4. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," NBER Working Papers 13893, National Bureau of Economic Research, Inc.
  5. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  6. Rupert, Peter & Rogerson, Richard & Wright, Randall, 2000. "Homework in labor economics: Household production and intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 557-579, December.
  7. Martin Browning & Mette Ejrnæs, 2009. "Consumption and Children," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 93-111, February.
  8. James Bullard & James Feigenbaum, 2006. "A leisurely reading of the life-cycle consumption data," Working Papers 2003-017, Federal Reserve Bank of St. Louis.
  9. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  10. Valerie A. Ramey, 2008. "Time Spent in Home Production in the 20th Century: New Estimates from Old Data," NBER Working Papers 13985, National Bureau of Economic Research, Inc.
  11. Fang Yang, 2009. "Consumption over the Life Cycle: How Different is Housing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 423-443, July.
  12. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
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Cited by:
  1. Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 207-248, May.

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