NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Consumption over the Life Cycle and over the Business Cycle

Orazio P. Attanasio, Martin Browning

NBER Working Paper No. 4453
Issued in September 1993
NBER Program(s):   EFG

The main aim of this paper is to assess the validity of the life cycle model of consumption. In particular, we address an issue that has recently received much attention, especially in the macroeconomic literature: that of "excess sensitivity" of consumption growth to income growth. We do this using a time series of cross sections and a novel and flexible parameterization of preferences. The former allows us to' address aggregation issues directly, while with the latter we can allow both the discount factor and the elasticity of intertemporal substitution eis to be affected by various observable variables and lifetime wealth. The main findings can be summarized as follows: (i) the excess sensitivity of consumption growth to labor income disappears when we control for demographic variables. This is true both at life cycle and business cycle frequencies. (ii) estimation of a flexible specification of preferences indicates that the elasticity of intertemporal substitution is a function of several variables, including the level of consumption. The eis increases with the level of consumption, as expected. (iii) the variables that change the eis are also important in explaining why we observe excess sensitivity over the business cycle. (iv) we are able to reconcile our results with those reported both in the macro and micro literature. (v) in our specification the elasticity of intertemporal substitution is not very well determined. This result, however, should be taken with care, as we have not made an effort to construct a 'preferred' specification, which would probably include additional controls for labor supply behavior. The evidence presented shows that the life cycle model cannot be easily dismissed. Indeed, we believe that the model does a good job at representing consumption behavior both over the life cycle and over the business cycle.

download in pdf format
   (2161 K)

download in djvu format
   (256 K)

email paper

This paper is available as PDF (2161 K) or DjVu (256 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4453

Published: Attanasio, Orazio P. and Martin Browning. "Consumption Over The Life Cycle And Over The Business Cycle," American Economic Review, 1995, v85(5,Dec), 1118-1137. citation courtesy of

Users who downloaded this paper also downloaded these:
Deaton w1910 Life-Cycle Models of Consumption: Is the Evidence Consistent with the Theory?
Attanasio and Weber w4795 Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey
Fernandez-Villaverde and Krueger w9382 Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data
Gourinchas and Parker w7271 Consumption Over the Life Cycle
Gomme, Rogerson, Rupert, and Wright The Business Cycle and the Life Cycle
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us