The Assessment: Consumer Expenditure
AbstractThis article aims to illuminate two sets of consumption puzzles. The first concerns the behavior of aggregate saving rates in the 1980s and early 1990s: collapse and rebound in Scandinavia and the U.K., and, apparently, a more secular decline in the U.S. The second set of puzzles concerns various apparent contradictions of the rational expectations permanent income hypothesis, e.g., in time series, the excess sensitivity of consumption changes to anticipated income changes and, in cross-sections, the tendency of consumption and income age-profiles to follow each other more than standard life-cycle theory implies. The article discusses, in relatively non-technical terms, the implications both for Euler equations and solved-out consumption functions of introducing uncertainty, credit constraint, consumption-leisure interactions, habits and durability, alternative to rational expectations, the illiquidity of some assets, and financial deregulation. It also compares the merits of Euler and solved-out models of aggregate consumption. Copyright 1994 by Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Review of Economic Policy.
Volume (Year): 10 (1994)
Issue (Month): 2 (Summer)
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