The Life-Cycle Model of Consumption and Saving

TLDR

Life‑cycle models imply that agents smooth consumption over time. The study reviews empirical evidence on consumption smoothing across different time scales. The authors analyze smoothing at frequencies ranging from intra‑year to lifetime. They find that life‑cycle models with realistic market and goods features are empirically successful, that observed deviations imply only minor welfare losses, and that the models’ coherence provides a useful discipline for incorporating new features.

Abstract

A central implication of life-cycle models is that agents smooth consumption. We review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime. We find that life-cycle models--particular those which incorporate realistic features of markets and goods--have more empirical successes than failures. We also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents. Finally, we emphasize that the coherence of life-cycle models imposes an important discipline when incorporating new features into models.