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Consumption Over the Life Cycle? How Different Is Housing?

Working Paper 635 | Published August 1, 2006

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Fang Yang Federal Reserve Bank of Dallas
Consumption Over the Life Cycle? How Different Is Housing?


Micro data over the life cycle shows two different patterns of consumption of housing and non-housing goods: the consumption profile of non-housing goods is hump-shaped while the consumption profile for housing first increases monotonically and then flattens out. These patterns hold true at each consumption quartile. This paper develops a quantitative, dynamic general equilibrium model of life cycle behavior, which generates consumption profiles consistent with the observed data. Borrowing constraints are essential in explaining the accumulation of housing assets early in life, while transaction costs are crucial in generating the slow downsizing of the housing assets later in life. The bequest motives play a role in determining total life time wealth, but not the housing profile.

Published in _Review of Economic Dynamics_ (Vol. 12, Iss. 3, July 2009, pp. 423-443),