Modigliani’s life-cycle theory * of savings fifty years later MAURO BARANZINI 1. Introduction In the early 1950s Franco Modigliani, with Richard Brumberg and Albert Ando, formulated the life-cycle theory of consumption and savings that enjoyed a huge and undisputed success for at least three decades. It replaced Keynes’s ‘fundamental psychological law’ of savings, according to which the marginal and average propensities to save grow as income rises. On the other hand, the life-cycle theory maintains that the level of savings depends on the age of consumers, and hence on the demographic structure of society rather than on the level of family income. But, since the early 1980s, the life-cycle theory has increasingly come under attack, for at least four reasons. One reason is the exis- tence of an important inter-generational transmission of wealth, to be imputed to motives that are exogenous to the life-cycle model. The second reason is the growing evidence that the rich continue to save more than the less fortunate, as Keynes in fact maintained. The third reason is that there is growing evidence, at least in Western Europe and Japan, that young families in their twenties and thirties save a positive and increasing proportion of their income, which is in sharp –––––––––– University of Lugano, Lugano (Switzerland) and City of Cambridge; e-mail:
[email protected]. * I am grateful to GianPaolo Mariutti, Roberto Scazzieri, Giandemetrio Maran- goni and other colleagues for helpful discussion and criticism of earlier drafts of this paper. I am also grateful to Caterina Mari, Amalia Mirante, Daniele Cereghetti, Marco Staffieri and Elena Taddei for precious research and editorial assistance.