Birth, Death, and Consumption: Overlapping Generations and the Random Walk Hypothesis

This paper studies the time-series behavior of consumption in a model that incorporates birth, death, and a precautionary motive for saving. Consumption of an individual agent is a random walk. However, aggregate consumption is a random walk if and only if the s u m of the death rate and population growth rate is zero. Failure of the random walk hypothesis should not be attributed to finite horizons per s e, but rather to inter-generational transfers caused by birth and death. Unlike certainty-equivalent models, the expected growth of consumption depends on financial wealth, rather than wage income or human capital. [D91, E21]