An approximate consumption function

This notes proposes an approximation to the consumption function in the buffer-stock model.Consumption, Precautionary Saving, Buffer Stock

Concave Consumption Function under Borrowing Constraints

This paper analyzes the optimal consumption behavior of a consumer who faces uninsurable labor income risk and borrowing constraints. In particular, it provides conditions under which the decision rule for consumption is a concave function of existing assets. The current study presents two main findings. First, it is shown that the consumption function is concave if the period utility function is drawn from the HARA class and has either strictly positive or zero third derivative. Second, it is shown that the same result can be obtained for certain period utility functions that are not in the HARA class.Consumption function, borrowing constraints, precautionary saving

Consumption-Saving Investigation: United States

This paper uses historical data from the United States to investigate the simple Keynesian consumption-income relationship. When structural breaks are taken into account, the theory of the simple Keynesian consumption function performs quite well in describing what is seen in the US data. Students and instructors of macroeconomic theory should be interested in these results, which demonstrate that the simple Keynesian consumption function does indeed perform quite well as a first approximation of the consumption-income relationship.consumption function, Keynesian, cointegration, structural change

Was Keynes Right? Does Current Year Disposable Income Drive Consumption Spending?

In the Keynesian consumption function, current income is asserted to be the main determinant of consumption. This paper examines the extent to which the Keynesian consumption function explains 1960 - 2000 U.S. consumption patterns. The results are compared to the longer term average income variables suggested by Friedman's Permanent income Hypothesis and Ando and Modigliani's Life Cycle Hypothesis as the income variable affecting consumption. We find variance explained by the consumption function drops dramatically when multi-year average incomes are substituted for the Keynesian current income variable. However, when added to the Keynesian function as a second income variable, they increase explained variance from 88% to 90%, compared to the Keynesian income variable alone. This small amount suggests that their may be a small portion of the U.S. population whose consumption decisions follow the more complex formulations suggested by the Permanent Income and Life Cycle hypotheses, while the simpler current income formulation used by Keynes appears to characterize the consumption function of most of the population.

Modeling the French Consumption Function Using SETAR Models

We provide new estimations on aggregate consumption series in France using the framework of non-stationary threshold models. Most macroeconomists agree with the idea that, since the beginning of the seventies, the saving ratio has evolved irregularly. Such irregularities are usually interpreted as being caused by mispecification problems or measurement errors. We suggest another explanation that strengthens the role played by structural breaks caused by endogenous factors such as habit formation. In this view, we use threshold models (SETAR) to study both the dynamics of short and long term in order to account for the existence of asymmetric effects in the relationship between consumption and some of its determinants. The estimations and forecasts obtained show that the SETAR error correction model leads to better performance than other specifications such as the usual linear error correction model, the quadratic error correction model and the cubic error correction model.