Consumption and saving behaviour: modelling recent trends

This paper illustrates recent trends in household consumption and personal savings in the UK and the US and discusses some theoretical models that can be used to interpret them. The trends in these two countries are interesting for several reasons. The decline in personal saving rates in the US during the 1980s is an unresolved puzzle. The corresponding variable in the UK has undergone large fluctuations, as have several other variables ranging from projected demographic trends to female labour supply. This paper stresses the need to analyse individual data to shed some light on these aggregate trends. It also stresses the need to have a sound structural model to interpret observed patterns in the data. The theoretical framework discussed throughout the paper is the life-cycle model, which views consumption and saving decisions as part of a dynamic optimisation process. The development of the model and the current research agenda and ways that it can be enriched with various degrees of sophistication are discussed. Particular attention is devoted to the discussion of the most recent developments.

Pension wealth and household saving: evidence from pension reforms in the UK

Using three major UK pension reforms as natural experiments we investigate the relationship between pension saving and discretionary private savings. Unlike most differences-in-differences approaches which rely on average differences between the control and the treatment group, we use economic theory to model the response of each individual household. The model permits us to use both time-series and cross-sectional variation in a consistent way to identify the behavioural response. The study is based on data from the Family Expenditure Survey. A measure of pension wealth is not observed, but we estimate it by applying the rules of the pension system to observed individual characteristics. The changes in pension wealth as a result of the reforms are substantial. The empirical analysis suggests that the earnings-related tier of the pension scheme has a negative impact on private savings with substitution elasticities approaching –1.0. The impact of the flat-rate tier of the scheme is found not to be significantly different from zero

Differential mortality and wealth accumulation

The issue of asset accumulation and decumulation is central to the life cycle theory of consumer behavior and to many policy questions. One of the main implications of the life cycle model is that assets are decumulated in the last part of life. Most empirical studies in this area use cross-sectional data of estimate mean or median wealth-age profiles. The use of cross-sections to estimate the age profile of assets is full of pitfalls. For example, if wealth and mortality are related, in that poorer individuals die younger, one overestimates the last part of the wealth-age profile when using cross-sectional data because means (or other measures of location) are taken over a population which becomes 'richer' as it ages. This paper examines the effect of differential mortality on cross-sectional estimates of wealth-age profiles. Our approach is to quantify the dependence of mortality rates on wealth and use these estimates to 'correct' wealth-age profiles for sample selection due to differential mortality. We estimate mortality rates as a function of wealth and age for a sample of married couples drawn from the Survey of Income and Program Participation (SIPP). Our results show that accounting for differential mortality produces wealth profiles with significantly more dissaving among the elderly

Relative wage movements and the distribution of consumption

We analyze how relative wage movements across birth cohorts and education groups during the 1980s affected the distribution of household consumption. The analysis integrates the labor economics literature on time variation in the wage structure with the consumption insurance literature. In contrast to previous tests of consumption insurance, we examine the impact of systematic, publicly observable shifts in the hourly wage structure. To circumvent the extreme scarcity of longitudinal data with high quality information on both consumption and labor market outcomes, we draw upon the best available cross-sectional data sources to construct synthetic panel data on consumption, labor supply and wages. We find that low-frequency movements in the cohort-education structure of pre-tax hourly wages drove large changes in the distribution of household consumption. The results constitute a spectacular failure of the consumption insurance hypothesis, and one that is not explained by existing theories of informationally constrained optimal consumption allocations. We also develop a procedure for assessing the welfare consequences of deviations from full consumption insurance and, in particular, from the failure to insulate the consumption distribution from relative wage shifts across cohort-education groups. For a coefficient of relative risk aversion equal to two, fully insulating households from group-specific endowment variation would raise welfare by an amount equivalent to a uniform 2.7% consumption increase

Dynamical stabilisation of complex Langevin simulations of QCD

The ability to describe strongly interacting matter at finite temperature and baryon density provides the means to determine, for instance, the equation of state of QCD at non-zero baryon chemical potential. From a theoretical point of view, direct lattice simulations are hindered by the numerical sign problem, which prevents the use of traditional methods based on importance sampling. Despite recent successes, simulations using the complex Langevin method have been shown to exhibit instabilities, which cause convergence to wrong results. We introduce and discuss the method of Dynamic Stabilisation (DS), a modification of the complex Langevin process aimed at solving these instabilities. We present results of DS being applied to the heavy-dense approximation of QCD, as well as QCD with staggered fermions at zero chemical potential and finite chemical potential at high temperature. Our findings show that DS can successfully deal with the aforementioned instabilities, opening the way for further progress.Comment: 11 pages, 15 figures and 2 tables; Added acknowledgment

Estimating Euler equations

In this paper we consider conditions under which the estimation of a log-linearized Euler equation for consumption yields consistent estimates of preference parameters. When utility is isoelastic and a sample covering a long time period is available, consistent estimates are obtained from the loglinearized Euler equation when the innovations to the conditional variance of consumption growth are uncorrelated with the instruments typically used in estimation. We perform a Montecarlo experiment, consisting in solving and simulating a simple life cycle model under uncertainty, and show that in most situations, the estimates obtained from the log-linearized equation are not systematically biased. This is true even when we introduce heteroscedasticity in the process generating income. The only exception is when discount rates are very high (e.g. 47% per year). This problem arises because consumers are nearly always close to the maximum borrowing limit: the estimation bias is unrelated to the linearization and estimates using nonlinear GMM are as bad. Across all our situations, estimation using a log-linearized Euler equation does better than nonlinear GMM despite the absence of measurement error. Finally, we plot life cycle profiles for the variance of consumption growth, which, except when the discount factor is very high, is remarkably flat. This implies that claims that demographic variables in log-linearized Euler equations capture changes in the variance of consumption growth are unwarranted

Preclinical Models: Boosting Synergies for Improved Translation

The field of preclinical models is a very vast arena, in which finding connections among groups acting in apparently very distant research areas can sometimes prove challenging [...

Improved convergence of Complex Langevin simulations

The sign problem appears in lattice QCD as soon as a non-zero chemical potential is introduced. This prevents direct simulations to determine the phase structure of the strongly interacting matter. Complex Langevin methods have been successfully used for various models or approximations of QCD. However, in some scenarios it converges to incorrect results. We present developments of our new method that helps to improve the convergence by keeping the system closer to the SU(3) manifold and discuss preliminary tests and results.Comment: 7 pages, 6 figures, talk presented at the 35th International Symposium on Lattice Field Theory (Lattice 2017), Granada, Spai

Stabilising complex Langevin simulations

We present updated results of dynamic stabilisation (DS) applied to complex Langevin simulations of QCD in the heavy-dense limit and with staggered quarks. We show that DS is able to keep the unitarity norm sufficiently small, which leads to excellent agreements with Monte-Carlo simulations, when the latter is applicable.Comment: 7 pages, 5 figures, 1 table. Talk presented at The 36th Annual International Symposium on Lattice Field Theor

Is consumption growth consistent with intertemporal optimization? evidence from the consumer expenditure survey

In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading