Abstract
Summers (1981) shows interest-sensitive labor wealth has a substantial effect on the interest elasticity of consumption in a life-cycle model. Sweeney (1988) shows interest-sensitive non-labor wealth also affects consumption choice, if altruistic bequests do not dominate consumer choice. Yet, most life-cycle models exclude interest-sensitive non-labor wealth. This paper embeds interest-sensitive non-labor wealth in a life-cycle model, derives a Slutsky equation for consumption, and simulates the interest elasticity of consumption. The simulations indicate that non-labor wealth can have a sizable impact on consumption choice in life-cycle models. This suggests that the common practice of excluding interest-sensitive non-labor wealth from life-cycle models could produce misleading macroeconomic policy conclusions.
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