Wealth Effects on Consumption in a Modified Life-Cycle Model.

It is the purpose of this paper to suggest that the role of wealth has been underestimated by ignoring uncertainty and to propose and test empirically a model which allows the wealth decision an independent part in the determination of consumption behaviour. In the next section, the model is presented as it concerns the individual; an analysis is made of wealth effects under perfect certainty and the considerable modifications needed in order to deal with uncertainty are discussed. In Section III, a macroeconomic version of the model is derived and tested against UK quarterly data. This section concludes with a discussion of the results and a numerical example designed to illustrate the magnitude of reactions to a change in stock market prices. Finally, in Section IV, the behaviour of the model in a steady growth environment is demonstrated and the steady growth savings ratio is tabulated as a function of the rate of growth of real income, the rate of inflation, and the rate of revaluation of wealth. [ABSTRACT FROM AUTHOR]