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Modigliani's life-cycle theory of savings fifty years later

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  • Mauro Baranzini

    (University of Lugano, Lugano (Switzerland) and City of Cambridge)

Abstract

In the 1950s, Modigliani proposed a theory of spending in which people make intelligent choices about their spending at each age limited by the resources available over their lives. By using assets and debts, working people can provide for their retirement and tailor their spending to their needs at each age independent of income at each age. The theory predicts that national saving depends on the growth of national income, not its level, and that aggregate wealth depends on the length of retirement. Fifty years later, the life-cycle hypothesis remains an essential part of economists' thinking. Without it, we would have much less to say about the private and public provision of social security, the effects of the stock market on the economy, the effects of demographic change on national saving, the role of saving in economic growth, and the determinants of national wealth.

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  • Mauro Baranzini, 2005. "Modigliani's life-cycle theory of savings fifty years later," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 58(233-234), pages 109-172.
  • Handle: RePEc:psl:bnlqrr:2005:29
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    1. Mauro Baranzini, 2005. "Modigliani's life-cycle theory of savings fifty years later," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 58(233-234), pages 109-172.
    2. Arrondel, Luc & Masson, Andre, 2006. "Altruism, exchange or indirect reciprocity: what do the data on family transfers show?," Handbook on the Economics of Giving, Reciprocity and Altruism, in: S. Kolm & Jean Mercier Ythier (ed.), Handbook of the Economics of Giving, Altruism and Reciprocity, edition 1, volume 1, chapter 14, pages 971-1053, Elsevier.
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    More about this item

    Keywords

    Life Cycle; Saving;

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • 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

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