Consumption, Savings and Demography
This paper estimates and tests an expected (multiperiod) utility maximization model of the joint determination of savings and of expenditures on different goods using panel data. The emphasis is on appropriate modelling of demographic effects (as taste shifters) and on the estimation of within period preferences that are consitent with intertemporal two stage budgeting under uncertainty. The parameters of the intratemporal utility function depend on demographic factors in a flexible way.
Certain implications of the rational expectations-life cycle hypothesis are tested along the lines of HALL(1978). The empirical results indicate rejection of the hypothesis and suggest the existence of liquidity constraints. However, for some forms of liquidity constraints the functional form of the within period demand functions is not affected. Therefore we have estimated a within period demand system, based on the Almost Ideal Demand System (A. I. D. S.) cost function. Both the allocation of consumption across the life cycle and the allocation of expenditures within a given period depend heavily on demographics.
KeywordsLabor Supply EULER Equation Forecast Error Stage Model Demand System
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