The Dynamics of Aggregate Consumption in an Open Economy Life Cycle Model.

This paper examines the dynamic path of aggregate consumption resulting from the relaxation of borrowing constraints and changes in the age composition of the population. Using simulation analysis, it indicates that, because of overlapping generations, the adjustment to a new steady-state aggregate consumption-income ratio following the relaxation of borrowing constraints is spread over a long time and it takes the form of a near linear fall following the immediate jump in the ratio. While potentially large, age composition changes have small effects on the aggregate consumption-income ratio when plausible parameter values are assumed. Copyright 1994 by Scottish Economic Society.