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Time preferences over the life cycle and household saving puzzles

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  • Kureishi, Wataru
  • Paule-Paludkiewicz, Hannah
  • Tsujiyama, Hitoshi
  • Wakabayashi, Midori

Abstract

Most economic models assume that time preferences are stable over time, but the evidence on their long-term stability is lacking. We study whether and how time preferences change over the life cycle, using representative long-term panel data. We provide new evidence that discount rates decrease with age and the decline is remarkably linear over the life cycle. Decreasing discount rates help a canonical life-cycle model explain the saving puzzles of households undersaving when young and oversaving after retirement. Relative to the model with constant discounting, the model’s fit to consumption and asset data profiles improves by 40% and 30%, respectively.

Suggested Citation

  • Kureishi, Wataru & Paule-Paludkiewicz, Hannah & Tsujiyama, Hitoshi & Wakabayashi, Midori, 2021. "Time preferences over the life cycle and household saving puzzles," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 123-139.
  • Handle: RePEc:eee:moneco:v:124:y:2021:i:c:p:123-139
    DOI: 10.1016/j.jmoneco.2021.10.004
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    1. Time Preferences over the Life Cycle and Household Saving Puzzles
      by Christian Zimmermann in NEP-DGE blog on 2021-03-29 21:52:42

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    More about this item

    Keywords

    Time preferences; Preference stability; Discount rates; Household saving puzzles;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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