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Consumption Over the Life Cycle

  • Pierre-Olivier Gourinchas
  • Jonathan A. Parker

This paper employs a synthetic cohort technique 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. Using these profiles, we estimate a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. The model fits the profiles quite well. In addition to providing tight 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. This change in behavior is mostly driven by the life-cycle profile of expected income. Our methodology provides a natural decomposition of saving into its precautionary and retirement components.

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File URL: http://www.nber.org/papers/w7271.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7271.

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Date of creation: Jul 1999
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Publication status: published as Gourinchas, Pierre-Olivier and Jonathan A. Parker. "Consumption Over The Life Cycle," Econometrica, 2002, v70(1,Jan), 47-89.
Handle: RePEc:nbr:nberwo:7271
Note: IFM EFG
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  1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
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  3. Clarida, R.H., 1991. "Aggregate Stochastic Implications of the Life Cycle Hypothesis," Discussion Papers 1991_14, Columbia University, Department of Economics.
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  14. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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  16. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
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  29. repec:dgr:kubcen:19934 is not listed on IDEAS
  30. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  31. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
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  1. Quantitative Macroeconomics and Real Business Cycles (QM&RBC)

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