Essays on life-cycle savings and consumption
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Date
2020
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Abstract
This dissertation is divided into four chapters. The first chapter includes a brief literature
survey on life-cycle precautionary saving. It presents a stochastic life-cycle model of consumption and savings and summarizes the empirical evidence on the degree of precautionary
saving.
The second chapter studies the savings behavior of households over the life-cycle by
revisiting Gourinchas and Parker (2002). I find that target wealth behavior differs substantially from actual savings behavior in a finite-horizon consumption life-cycle model. While
the target value of wealth is a good indicator of the overall direction to which the distribution of normalized cash-on-hand moves, it fails to describe the magnitude of household
overall savings. Furthermore, the age-profile of the target value of liquid wealth depends
crucially on the model’s assumptions instead of observed consumer behavior. Moreover,
the target value of cash-on-hand is sensitive to small changes (within confidence intervals
for such parameter values) in the model’s parameters, such as the interest rate, when the
marginal propensity to consume is less than one.
The third chapter examines the aggregate implications of the individual life-cycle behavior predicted by Gourinchas and Parker (2002) in light of Carroll (2000). I show that
the appropriateness of a representative-agent depends on the age of the population and the
retirement income profile. However, I find that the predicted distribution of cash-on-hand
does not match the wealth holdings in microeconomic data, despite the various combinations of parameter values that are considered. This discrepancy sheds light in the suitability
of the life-cycle model to reproduce the observed saving behavior across U.S. households.
The fourth chapter evaluates the use of the endogenous grid-points solution method
when estimating a stochastic life-cycle model. The Monte Carlo results suggest that one
must be cautious when adopting this solution method when numerically minimizing the
Simulated Method of Moments estimators’ objective function. The mode of the SMM
estimates for the coefficient of risk aversion is approximately zero when its true value is
small.
Description
Tesis (Doctor of Philosophy)--Pontificia Universidad Católica de Chile, 2020