life-cycle hypothesis

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life-cycle hypothesis

the hypothesis that states that current CONSUMPTION is not dependent solely on current DISPOSABLE INCOME but is related to a person's anticipated lifetime INCOME. For example, a young worker may purchase products such as a house on extended CREDIT because he or she expects his or her future income to rise as he or she moves up a salary scale or obtains increases in basic wage rate and thus will be able to pay future interest and repayment charges. By contrast, an older worker nearing retirement may limit his or her consumption from current income in anticipation that his or her income will fall after retirement. Long-term consumption may also be related to changes in a person's WEALTH, in particular the value of his or her house, over time.

The economic significance of the life-cycle hypothesis is that in the short term the level of consumption may be higher (or lower) than that indicated by the level of current disposable income. See KEYNESIAN ECONOMICS, CONSUMPTION FUNCTION, PERMANENT INCOME HYPOTHESIS.

References in periodicals archive ?
Impact of social distance on intertemporal consumption decisions
Second, young households even in financially less-developed Asia are not subject to financial constraints with respect to their intertemporal consumption planning.
If saving is exogenous to self-insurance, the choice of effort is the only variable to improve the individual's intertemporal consumption stream.
Incomplete Intertemporal Consumption Smoothing and Incomplete Risk Sharing.
Risk Aversion Versus Intertemporal Substitution: A Case Study of Identification Failure in the Intertemporal Consumption Capital Asset Pricing Model" Journal of Business & Economic Statistics, October 2001, 19(4), pp.
In other words, labor income y is less permanent for the agent with higher [lambda], so intertemporal consumption smoothing implies he will save more.
Second, I explicitly extend the analysis of the effects of the central bank's manipulation of interest rates from entrepreneurial choice among the length of production processes to household choice among intertemporal consumption patterns.
2007) Intertemporal Consumption Smoothing and Capital Mobility: Evidence from Malaysia.
It causes difficulties for models based on intertemporal consumption.
We consider the intertemporal consumption optimization problem of an investor.
Table 5 makes it clear that the intertemporal consumption tax wedge depends on whether nominal or real incomes are being taxed.
These factors are said to obscure the view of the essence of interest theory, which is the exchange of intertemporal consumption streams.