How Does Future Income Affect Current Consumption?

This paper tests a straightforward implication of the basic life cycle model of consumption: that current consumption depends on expected lifetime income. The paper projects future income for a panel of households and finds that consumption is closely related to projected current income but unrelated to predictable changes in income. However, future income uncertainty has an important effect: consumers facing greater income uncertainty consume less. The results are consistent with 'buffer-stock' models of consumption like those of Angus Deaton (1991) or Christopher D. Carroll (1992), where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.