Revisiting the Consumption Puzzle: Evidence for Spain

We examine empirically the path of consumption growth over time by looking at detailed microdata for the Spanish economy. We estimate different versions of a Euler equation linking consumption growth to the real interest rate and other socioeconomic and demographic variables. We work with two thorough datasets of microdata which compile rich economic, social and demographic information for households over two periods, 1977-1983 and 1985-1996. We find that consumption growth displays a positive and significant correlation with the interest rate, implying an intertemporal elasticity of substitution in the range 0.30-0.576, consistent with the literature. Our estimations also show that consumption growth is negatively correlated with retirement, thus suggesting a discontinuity in consumption which implies a departure from the standard life cycle model. Policy reforms which increase the level of real pensions have a positive impact on consumption. Results are robust to alternative specifications and control variables, and suggest the presence of precautionary saving over 1977-83.