The Life Cycle Hypothesis (LCH) is an economic concept analysing individual consumption patterns. It was developed by the economists Irving Fisher, Roy Harrod, Alberto Ando and Franco Modigliani.
Unlike the Keynesian consumption function, which assumes consumption is entirely based on current income, LCH assumes that individuals consume a constant percentage of the present value of their life income. The life-cycle model also predicts that individuals save while they work in order to finance consumption after they retire. If this theory is true, the US economy should see a large drop in individual saving over the next two decades as a large segment of the population reaches retirement age. #edited by Agik# Miller however carried the stable consumption pattern by observing that people would try to stabilize consumption over their entire lifetime. He stressed the way consumers save their pY. It's based on forward looking expectations. The future provides rigorous connection between consumption exp. and value of asset held by consumer. Household consumption over their life time should equal to HH Y + Holding of assets that come from other sources other than work e.g gifts.
Literature
- Robert E. Hall, 1979. Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence, NBER
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