Intergenerational Transfers and Life Cycle Consumption.

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    • Abstract:
      This paper can be thought of as a discussion of what it means to take the life-cycle model seriously. In this spirit, it explores the role of intergenerational transfers and, in particular, the wealth elasticity of bequests in the aggregate consumption function. However, it would be a mistake to take the life cycle hypothesis too seriously. Its central message that the lifetime pattern of consumption is independent of the lifetime pattern of earnings-cannot be literally true in a world where there is uncertainty, where working and consuming are competing uses of time, and where the ability to borrow against future earnings is severely limited. The author concentrates on capital market constraints, stressing how intergenerational transfers help determine which households are constrained and which are not. Though the orientation is clearly theoretical, the relevance to public policy cannot be missed in view of recent fiscal policy actions. While there are many principles according to which households an be divided, find it useful to think of the aggregate consumption function as a weighted average of the consumption functions of two types: planners and reactors.