The Impact of Life Cycle Theory on Household Savings.pdf

The theory formulated by Modigliani and Brumberg back in 1954 namely the Life Cycle Theory of savings and Consumption observed a „hump-shape‟ throughout the lifetime of a person. This has been the major knowledge until recent studies have shown that it doesn't follow the hump-shape pattern that the theory suggests. Some observe it as non-existent while some even see a double hump. This theory is frequently related to household savings and mainly for macro-level studies. The proponents used it to study the National Capital Region of the Philippines to look at the importance of understanding savings under the life cycle model in connection to the saving patterns of households at a micro level. The proponents follow one of the models modified by Movshuk (2009) which is a semi-parametric smoothing cohort model and use the data of the Family Income and Expenditure Survey (FIES) from 1997 to 2006 conducted every three years. Using pseudo-panel data, the proponents observed household heads with the same age range to trace the common traits within the groups. The results of the study contradict the life cycle hypothesis. This may be due to the fact that there are key differences in the saving behavior of the households in the NCR as compared to other studies, such as cultural differences, motivation for saving, and purpose for saving.