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

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

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.