Consumption Over the Life Cycle: Theory and Empirical Regularities

Simple life cycle and permanent income hypotheses imply that changes in consumption should be unforecastable. Rational forward-looking agents ought to smooth consumption over the life cycle and exhaust the asset stock accumulated during the working career in retirement. Empirical observations seem not to conform to these predictions of the simple theory of intertemporal choice which has given rise to elaborations on the benchmark model. The theoretical discussion of this paper concentrates on literature dealing with the seemingly problematic empirical regularities and on proposed explanations. The review of literature focuses particularly on the life cycle issues of consumption behaviour.