What is consumption smoothing?

Consumption smoothing is the practice of optimizing our standard of living by ensuring a proper balance between spending and saving during the different phases of our lives. Those who overspend and put off saving for retirement to enjoy a higher standard of living often have to work longer or reduce their standard of living in retirement.

How do you achieve consumption smoothing?

To achieve consumption smoothing, most people plan and try to stick to a budget so that they can pay their bills when they come due. As an economics concept, consumption smoothing captures the desire of people to have a stable path of consumption.

Do counterfactual savings rely on consumption smoothing?

Furthermore, we show that, using counterfactual savings that rely on the idea of consumption smoothing, excess savings are currently positive in the case that households assume that recent income losses are transitory. These findings carry additional implications for expected personal consumption expenditure patterns.