Finite horizons, life-cycle savings, and time-series evidence on consumption

This paper develops an explicitly aggregated life-cycle model which allows for finite horizons and declining individual labor supply. The model can generate a common upward trend in aggregate consumption, labor income, and nonhuman wealth, without relinquishing Hall's random walk at the micro level. Life-cycle factors are shown to imply that consumption changes should be (a) predictable and (b) smoother than in the infinite-horizon model. Econometric evidence using postwar U.S. data suggests that neither consumption's predictability nor its excess smoothness can be fully accounted for by life-cycle considerations.