A leisurely reading of the life-cycle consumption data

Description

"One of the major puzzles in consumption theory currently is the observation of a hump in age-consumption profiles. Whereas the standard life-cycle permanent income hypothesis predicts that consumption should be smooth and grow (or decay) exponentially over time, actual consumption increases in the beginning of life and falls off toward the end of life. We study a general equilibrium life-cycle economy with capital in which households include both consumption and leisure in their period utility function. We calibrate the model by matching salient balanced growth facts from macroeconomics, as well as key aspects of the data on labor supply over the life cycle. We find that a significant hump in life-cycle consumption is a feature of the steady state under such a calibration. This suggests that the inclusion of leisure in household preferences may provide one part of the explanation of observed life-cycle consumption humps"--Federal Reserve Bank of St. Louis web site.

Subjects

Series Statement

• Working paper ;
• 2003-017C
• Working paper (Federal Reserve Bank of St. Louis : Online) ;

Links

• URL
• http://research.stlouisfed.org/wp/more/2003-017/