Consumption Theories
Economics 314 Coursebook, 2010
Jeffrey Parker
16 THEORIES OF CONSUMPTION AND
SAVING
Chapter 16 Contents
A. Topics and Tools............................................................................. 1
B. The Kuznets Paradox ....................................................................... 3
C. Relative-Income Hypothesis .............................................................. 5
D. Life-Cycle Model and Permanent-Income Hypothesis .............................. 7
Life-cycle model ............................................................................................................8
Permanent-income hypothesis ........................................................................................9
Permanent vs. temporary changes in income ................................................................. 11
The dangers of ignoring macroeconomists: A policy faux pas .......................................... 12
E. Understanding Romer=s Chapter 7 ....................................................... 13
Empirical consumption functions ................................................................................. 13
Uncertainty, rational expectations, and consumption ..................................................... 14
Quadratic utility ........................................................................................................ 16
F. Empirical Tests of the Random-Walk Hypothesis.................................... 16
Testing the random-walk hypothesis............................................................................. 18
Later tests and excess sensitivity of consumption to income.............................................. 20
G. Suggestions for Further Reading ........................................................ 23
Classic studies of consumption ..................................................................................... 23
Some recent advances
Jeffrey Parker
16 THEORIES OF CONSUMPTION AND
SAVING
Chapter 16 Contents
A. Topics and Tools............................................................................. 1
B. The Kuznets Paradox ....................................................................... 3
C. Relative-Income Hypothesis .............................................................. 5
D. Life-Cycle Model and Permanent-Income Hypothesis .............................. 7
Life-cycle model ............................................................................................................8
Permanent-income hypothesis ........................................................................................9
Permanent vs. temporary changes in income ................................................................. 11
The dangers of ignoring macroeconomists: A policy faux pas .......................................... 12
E. Understanding Romer=s Chapter 7 ....................................................... 13
Empirical consumption functions ................................................................................. 13
Uncertainty, rational expectations, and consumption ..................................................... 14
Quadratic utility ........................................................................................................ 16
F. Empirical Tests of the Random-Walk Hypothesis.................................... 16
Testing the random-walk hypothesis............................................................................. 18
Later tests and excess sensitivity of consumption to income.............................................. 20
G. Suggestions for Further Reading ........................................................ 23
Classic studies of consumption ..................................................................................... 23
Some recent advances
Cited: Campbell, John Y., and N. Gregory Mankiw. 1989. Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence. NBER Macroeconomics Annual 4:185-216. Duesenberry, James S. 1949. Income, Saving, and the Theory of Consumption Behavior. Flavin, Marjorie. 1993. The Excess Smoothness of Consumption: Identification and Interpretation Friedman, Milton. 1957. A Theory of the Consumption Function. Princeton, N.J.: Princeton University Press. Hall, Robert E. 1978. Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money. Modigliani, Franco, and Richard Brumberg. 1954. Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data. In PostKeynesian Economics, edited by K. K. Kurihara. New Brunswick, N.J.: Rutgers University Press. Shea, John. 1995. Union Contracts and the Life-Cycle/Permanent-Income Hypothesis. American Economic Review 85 (1):186-200. Zeldes, Stephen P. 1989. Consumption and Liquidity Constraints: An Empirical Investigation. Journal of Political Economy 97 (2):305-346.