Life cycle hypothesis

The Concept of Life Cycle Hypothesis developed by economists Franco Modigliani and his student Richard Brumberg in the early 1950s.

1. Life Cycle Hypothesis Macroeconomics

2. INTRODUCTION Economic Theory which describes the spending and saving habits of people. Concept developed by Franco Modigliani , Alberto Ando and Richard Brumberg in 1950s. Individuals seek to smooth consumption throughout their lifetime . A graph of an individual's spending overtime thus shows a hump-shaped pattern in which  wealth  accumulation is low during youth and old age and high during middle age.

3. Comparison with Keynes: Keynes believed that savings were just another good and that the percentage individuals allocated to their savings would grow as their incomes rose. Another problem with Keynes' theory is that he did not address people's consumption patterns over time.

4. Special Assumptions: P eople deplete their wealth during old age. People work more during working age. Th ose with high incomes are more able to save and have greater financial savvy than those on low incomes. Lastly, safety nets or  means-tested  benefits for the elderly may discourage people from saving

5. Consumption will depend upon: WEALTH+EXPECTED LIFETIME EARNING+NUMBER OF YEARS UNTIL RETIREMENT It suggests for the whole economy consumption will be a function of both wealth and income.

6. Criticisms of Life Cycle Theory It assumes people run down wealth in old age, but often this doesn’t happen. It assumes people are rational and forward planning. Life-cycle is easier for people on high incomes. Individuals may prefer to smooth out leisure. Government means-tested benefits for old-age people may provide an incentive not to save.