Non-Linear Modelling of Household Consumption: an Examination of a Closed-Form Life-Cycle Model

Publication date: 12 May 2003 | Publication type: NIESR Discussion Paper | Theme: Trade, Investment & Productivity, Britain & Finance | NIESR Author(s): Riley, R; Weale, M | JEL Classification: D91, E21 | NIESR Discussion Paper Number: 206

We use successive datasets from the U.K. Family Expenditure Survey to estimate a closed form consumption function for households facing uncertain future income. The closed form is derived from a model of absolute risk aversion modified to reflect differences in consumers' circumstances (quasi-relative risk aversion). Proper adjustment is made for demographic effects. Plausible estimates for the intertemporal substitution parameter are found. However an encompassing test shows that a naive Keynesian model has some residual explanatory power.

Keyword tags: 
household consumption, life-cycle model, naive alternative, non-nested test