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Consumption Over the Life Cycle

Author

Listed:
  • Pierre-Olivier Gourinchas

    (Dept. of Economics, Princeton University, U.S.A.)

  • Jonathan A. Parker

    (Dept. of Economics and Woodrow Wilson School, Princeton University, U.S.A.)

Abstract

This paper estimates a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the life cycle. Young consumers behave as buffer-stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life-cycle components. Copyright The Econometric Society 2002.

Suggested Citation

  • Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
    • Handle: RePEc:ecm:emetrp:v:70:y:2002:i:1:p:47-89
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    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods

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    1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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