Household Consumption in Sweden: Estimation and Simulation of a Life Cycle Model

This paper is concerned about the allocation of households’ consumption expenditure over time in a life cycle environment. We construct a pseudo panel from a time series of cross sections using average cohort procedures. The parameters of a CRRA utility function with socio-demographic dependent marginal utility is then estimated by GMM using an Euler approach. Stochastic dynamic programming techniques are applied to simulate the optimal consumption paths for different types of stochastic income processes. Our findings are that the life cycle model can imitate observed consumption behavior once one diverts from the simple textbook version.