Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 27/2004: Consumption and population age structure

Solveig Erlandsen and Ragnar Nymoen ()
Additional contact information
Solveig Erlandsen: Norges Bank, Postal: Bankplassen 2, P.O. Box 1179 Sentrum, N-0107 Oslo, Norway
Ragnar Nymoen: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: In this paper the effects on aggregate consumption of changes in the age distribution of the population are analysed empirically. Economic theories predict that age influences individuals’ saving and consumption behaviour. Despite this, age structure effects are rarely controlled for in empirical consumption functions. Our findings suggest that they should. By analysing Norwegian quarterly time series data we find that changes in the age distribution of the population have significant and life cycle consistent effects on aggregate consumption. Furthermore, controlling for age structure effects stabilizes the other parameters of the consumption function and reveals significant real interest rate effects. Simulation experiments show that the numerical effect on the savings rate of age structure changes is substantial when the indirect effects via wealth and income are accounted for.

Keywords: Consumption; demography; savings; time series models; cointegration.

JEL-codes: C51; C53; E21; J10

22 pages, April 6, 2005

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