HOW DOES FUTURE INCOME AFFECT CURRENT CONSUMPTION

This paper tests a straightforward implication of the basic Life Cycle model of consumption: that current consumption depends on expected li fetime income. The paper projects future income for a panel of househo lds and finds that consumption is closely related to projected current income, but unrelated to predictable changes in income. However, futu re income uncertainty has an important effect: consumers facing greate r income uncertainty consume less. The results are consistent with ''b uffer-stock'' models of consumption like those of Deaton [1991] or Car roll [1992a, 1992b], where precautionary motives greatly reduce the wi llingness of prudent consumers to consume out of uncertain future inco me.