Working Paper: CEPR ID: DP2345
Authors: Pierre-Olivier Gourinchas; Jonathan A. Parker
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; Precautionary Savings; Life Cycle; Simulated Moments
JEL Codes: C61; D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected income profiles (E25) | consumption behavior (D10) |
| age (J14) | consumption behavior (D10) |
| age (J14) | accumulation of liquid assets for retirement (D14) |
| income uncertainty (D89) | precautionary saving behavior (D14) |
| precautionary saving (D14) | retirement motives (J26) |
| age-related factors (J14) | saving behavior (D14) |
| discount rate (E43) | consumption behavior (D10) |
| marginal propensity to consume at retirement (D15) | consumption behavior (D10) |
| relative risk aversion coefficient (D11) | saving behavior (D14) |