Intertemporal consumer behaviour under structural changes in income

In this paper we analyze models of forward looking consumer behaviour and give empirical evidence for aggregate quarterly data for the Netherlands, 1967-1984. Special attention is devoted to the implications of unanticipated structural changes in the income process, which because of replanning, will have an impact on the consumption decision. We start with the life cycle hypothesis. Since the fall in aggregate consumption in the Netherlands in the eighties can not be explained by the life cycle model, the theory is reformulated by assuming that the planning horizon of the consumers moves ahead as time goes on. As a result, an error correction mechanism has to be introduced in the consumption function.The modified model is found to be in agreement with the data.