He compared and studied housing and non-housing goods with the modification to simple life cycle hypothesis which can more resemble the consumption patterns of US. He stated an individual occupies house due two main reasons: it could be used as a utility and can also be used as collateral. The modified framework he developed had some frictions in it that have been to be faced by the households: income risks; borrowing constrains; lack of an annuity market to insure against an uncertain lifetime; and transaction costs of trading houses. He claims that household save to self-insure and to enjoy services from housing. He gathered consumption data and asset data to construct synthetic cohorts from each data set. In the model he has taken some main dependent variables Technology and timing; The rental market; Demographics; Consumer's maximization problem; Transaction costs; and Borrowing constraints. The Numerical results studies the implications of the model economy for homeownership rates by age and for the life-cycle consumption and wealth profiles for both homeowners and renters.
1) demographic developments represent a macroeconomic shock, which might lead to abrupt movements in asset prices and sharp movements in saving behavior.
2)the natural interest falls both across the transition path and in the steady state.
3) the natural rate of unemployment can also be influenced through the matching mechanism5.
4) the wealth channel will probably become a more important transmission channel of monetary policy than intertemporal substitution.
5) the Phillips curve is flatter due to immigration and the increased participation of retired workers whose way to obtain labor is considered to be relatively elastic.
6) the constituency for keeping inflation low will be larger because of higher average wealth accumulation.
7) societal aging may induce diversification and risk-shifting with a securitized market rather than bank-intermediated finance, which includes implications for financial stability.
The model they used is canonical model, with the main variables of Firms, Capital producers, Financial intermediaries, households and monetary policies. The sub variables and intervening variables are also discussed in detail. Paper concluded that First, the natural rate of interest differs as demographics change. Second, the structural shocks to the economy have asymmetric effects on heterogeneous agents, namely personnel and retirees.
They documented that household age-consumption profiles, adjusted for both economical growth and family size, have a definite and statistically significant hump, with actual consumption on the increase during ages 20-40 and falling off during ages 50-70. Paper has also done a quantitative analysis on US data of households. They concluded that taking account of the effects of consumption leisure substitutability in household preferences can help explain the life span cycle consumption data that is considered puzzling.
The behavioral life-cycle model as developed by Shefrin and Thaler is a straightforward model of self-control based on three ideas. First, folks are tempted to spend almost all their resources on current consumption rather than saving for future years. Second, individuals who save, overcome this self-control problem by investing in a variety of assets that have different degrees of temptation associated with them. Third, setting up these mental accounts implies that individuals take part in `framing' someone's consumption spending not only will depend on total wealth but also is determined by how that wealth is allocated among assets with differing levels of `temptation'. For example, folks are more willing to spend assets they have labeled current income than those they may have labeled wealth or the ones that they expect in the future. This paper has four major results. First, spending appears to be very sensitive to changes in income but much less sensitive to changes in wealth. Second, close examination of the relation of wealth to consumption reveals a pattern where individuals treat assets as not being fungible (equal to each other). Third, liquidity constraints affect consumption not as the conventional model predicts however in a manner constant with the existence of either financial or psychological transaction costs. The affect of the constraints can also be evidence of a behavioral bequest motive. Finally, the amount allocated to particular goods appears to depend not only on the individual's total resources but also on how those resources are split between different assets.
The paper concluded that the empirical life cycle consumption profile in america has a hump that peaks around age 50. That is typically considered a puzzle since the complete markets life cycle model would create a consumption profile that is monotonic over the life span cycle.
The results obtained in this paper and they show that there surely is a discontinuity between the characterization of the finite horizon optimal solution and of the infinite horizon optimal one.
Our main analytical result is a necessary and sufficient condition under which any amount of overconfidence concerning the mean return on savings can produce a hump in the work-life consumption profile. There instinct is that consumer overconfidence might not just have important implications for trading and asset prices, but also for consumption as well. We thus study the implications of consumer overconfidence in an over-all life-cycle consumption/saving model. The paper has have shown that overconfidence concerning the mean return on savings can create a work-life consumption hump while overconfidence about the variance of the return has little influence on the long-run average behavior of consumption over the life cycle, and our basic conclusion is fairly robust with various realistic modifications to the baseline model.
They figured our survey evidence on faculty pay-cycle choice strongly contradicts the neoclassical theory of consumer behavior. It is more favorable to the behavioral life-cycle theory of Shefrin and Thaler (1988).
The paper has studied the patterns of people saving and consumption in relation inflation. Paper figured before there were occasions when consumers with differing price expectations did not differ in their rate of discretionary spending; while there were other occasions when perceptions of price advances led to a reduction in the rate of consumer spending.
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