Life-cycle consumption in Portugal

February 26, 2020

How does personal consumption evolve over the life-cycle? According to the permanent income/life-cycle theory of consumption, primarily associated with Milton Friedman and Franco Modigliani, the answer to this question is that consumers try to smooth consumption over time, with significant adjustments occurring only in the event of permanent shocks to income. Empirical studies of consumption behavior, however, tend to find that consumption presents a hump-shaped pattern, mimicking the life-cycle pattern of income. A study conducted with US household data (Fernández-Villaverde and Krueger, 2007) find that from the beginning of the life cycle to the moment when the peak in consumption is reached in the late forties, consumption increases by about 30%.

This paper applies the approach of Fernández-Villaverde and Krueger (2007) to the Portuguese Household Budget Survey (“Inquérito às Despesas das Famílias (IDEF)"), made available by Statistics Portugal (INE). The estimates indicate that, for Portuguese households, the hump in consumption is much smaller: only 11%. The results suggest that the behavior of Portuguese households is much closer to that predicted by the permanent income/life-cycle theory of consumption. This result is in line with cross-sectional analyses of consumption in Portugal (Alves and Cardoso, 2010, and Banco de Portugal, 2018).

One possible explanation for this result concerns the composition of households. In Portugal (as in other Southern European countries), young people tend to live with their parents for longer. Perhaps young people only leave their parents’ home when they are able to maintain a relatively high level of consumption on their own. Consumption smoothing may therefore be achieved inside a household by the sharing of resources between the old and the young. In this case, the family should also be understood as a mechanism of consumption smoothing.

Click here to go to the paper by Fernando Alexandre, Pedro Bação, and Miguel Portela.