The Empirical Failure of the Life Cycle Model with Perfect Capital Markets

James Pemberton

Oxford Economic Papers, 1997, vol. 49, issue 2, 129-51

Abstract: This paper calibrates a life cycle model which incorporates standard assumptions, similar to those in F. Modgliani's (1986) 'stripped down' version, including perfect capital markets. The resulting model generates strongly counterfactual predictions: planned wealth is negative for all or most of life, following a W-shaped rather than a hump-shaped profile. (Equivalently, the debt profile is M-shaped.) The paper argues that introducing capital market imperfections can resolve many of the problems, though some issues remain, and further research is warranted. Copyright 1997 by Royal Economic Society.

Date: 1997
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