The "life cycle" hypothesis of saving: Aggregate implications and tests

Abstract

This paper, gives a brief summary of the major aggregative implications of the Modigliani-Brumberg life cycle hypothesis of saving. It also presents the results of a number of empirical tests for the U.S., which appear to support the hypothesis. The Modigliani-Brumberg model starts from the utility function of the individual consumer: his utility is assumed to be a function of his own aggregate consumption in current and future periods. The individual is then assumed to maximize his utility subject to the resources available to him, his resources being the sum of current and discounted future earnings over his lifetime and his current net worth. As a result of this maximization the current consumption of the individual can be expressed as a function of his resources and the rate of return on capital with parameters depending on age. The individual consumption functions thus obtained are then aggregated to arrive at the aggregate consumption function for the community. The most crucial