Consumption Over the Life-Cycle

54 Pages Posted: 4 May 2001

See all articles by Pierre-Olivier Gourinchas

Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics; University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2000

Abstract

This paper employs 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 labour 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 behaviour changes strikingly over the life-cycle. Young consumers behave as buffer-stock agents. Around the age of 40, the typical household starts accumulating liquid assets for retirement and its behaviour mimics more closely that of a certainty equivalent consumer. This change in behaviour 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.

Keywords: Buffer stocks, life cycle, precautionary savings, simulated moments

JEL Classification: C61, D91, E21

Suggested Citation

Gourinchas, Pierre-Olivier and Parker, Jonathan A., Consumption Over the Life-Cycle (January 2000). Available at SSRN: https://ssrn.com/abstract=268854

Pierre-Olivier Gourinchas (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://sites.google.com/view/pgourinchas

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/view/pgourinchas

National Bureau of Economic Research (NBER)

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HOME PAGE: http://www.nber.org/people/pierre-olivier_gourinchas

Centre for Economic Policy Research (CEPR)

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United Kingdom

HOME PAGE: http://cepr.org/active/publications/discussion_papers/authorlist.php?ident=136737

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA
United States
617-253-7218 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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