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The Effect of Current Income on Aggregate Consumption

Author

Listed:
  • Manisha Chakrabarty

    (University of Bonn)

  • Anke Schmalenbach

    (University of Bonn)

Abstract

Using the statistical distributional approach of aggregation by Hildenbrand and Kneip (1999, 2002), this paper attempts to find out to what extent current labour income can explain the relative change in aggregate consumption expenditure. The coefficients of the changes in the income distribution are estimated as an average derivative of the cross-section Engel curve. We use the UK-FES [1974-1993] to estimate these coefficients separately for each year by a nonparametric estimation procedure. It is found that the change in current labour income plays a significant role for the commodity groups services and total nondurable, thereby contradicting the implications of the traditional life-cycle/permanent income hypothesis. For services the inclusion of dispersion in addition to the mean of the income distribution improves the goodness-of-fit of the model.

Suggested Citation

  • Manisha Chakrabarty & Anke Schmalenbach, 2002. "The Effect of Current Income on Aggregate Consumption," The Economic and Social Review, Economic and Social Studies, vol. 33(3), pages 297-317.
    • Handle: RePEc:eso:journl:v:33:y:2002:i:3:p:297-317
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    References listed on IDEAS

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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Blundell, Richard & Stoker, Thomas M., 2007. "Models of Aggregate Economic Relationships that Account for Heterogeneity," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 68, Elsevier.
    3. Hildenbrand, Werner & Kneip, Alois, 2002. "Aggregation under structural stability: the change in consumption of a heterogeneous population," Bonn Econ Discussion Papers 4/2002, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 631-649.
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    6. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    7. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
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    10. Hildenbrand, Werner, 1998. "How relevant are specifications of behavioral relations on the micro-level for modelling the time path of population aggregates?," European Economic Review, Elsevier, vol. 42(3-5), pages 437-458, May.
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    Cited by:

    1. Ashok S. Guha & Brishti Guha, 2005. "Future Targets and Multiple Equilibria," Macroeconomics Working Papers 22423, East Asian Bureau of Economic Research.
    2. Guha Brishti & Guha Ashok S, 2008. "Target Saving in an Overlapping Generations Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-26, March.
    3. Chakrabarty, Manisha & Schmalenbach, Anke, 2002. "The Representative Agent Hypothesis: An Empirical Test," Bonn Econ Discussion Papers 26/2002, University of Bonn, Bonn Graduate School of Economics (BGSE).

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