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How does future income affect current consumption?

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  • Christopher D. Carroll

Abstract

This paper tests a straightforward implication of the basic Life Cycle model of consumption: that current consumption depends on expected lifetime income. The paper projects future income for a panel of households and finds that consumption is closely related to projected current income, but unrelated to predictable changes in income. However, future income uncertainty has an important effect: consumers facing greater income uncertainty consume less. The results are consistent with "buffer-stock" models of consumption like those of Deaton [1991] or Carroll [1992a, 1992b], where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income.
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Suggested Citation

  • Christopher D. Carroll, 1992. "How does future income affect current consumption?," Working Paper Series / Economic Activity Section 126, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgwe:126
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    Keywords

    Consumption (Economics) ; Income;

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