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.

Wage shocks and consumption variability in Mexico during the 1990s

This paper presents evidence on the relationship between shocks to relative male wages, and changes in household consumption in Mexico during the 1990s decade, which is a period characterized by high volatility. Apart from performing analysis of this type for Mexico for the first time, the paper has mainly two contributions. The first is the use of alternative data sources to construct instrumental variables for wages. The second is to examine differences across four consumption categories: non-durable goods, durable goods, education and health. Our results for non-durable goods consumption reject the hypothesis that Mexican households are able to insure idiosyncratic risk. For the comparisons across consumption categories, the conclusion is that households in Mexico tend to react to temporary shocks by contracting the consumption of goods that represents longer run investment in human capital, which makes them more vulnerable in the future

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

IRAs and household saving revisited: some new evidence

The effectiveness of tax-favored savings accounts in raising national savings depends crucially upon the willingness of households to reduce consumption in order to finance contributions to these accounts. The debate over the tax deductibility of IRA's has centered on whether IRA contributions represented new savings or reshuffled assets. We devise a test to distinguish between these two hypotheses where we compare the behavior of households which just opened an IRA account with that of households which already had an IRA account. Our test accounts for any unobservable heterogeneity across the two groups. We find evidence that supports the view that households financed their IRA contributions primarily through reductions in their stocks of other assets. Our results indicate that less than 20% of IRA contributions represented addition to national savings

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

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

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

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