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The Relative Permanent Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model

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  • Thomas Palley

Abstract

This paper presents a theory of consumption that synthesizes the seminal contributions of Keynes (1936), Duesenberry (1948), and Friedman (1957). The model is labeled the 'relative permanent income' theory of consumption. The key feature is that the share of permanent income devoted to consumption is a negative function of household relative permanent income. The model generates patterns of consumption spending consistent with both long-run time series data for aggregate consumption and empirical findings from cross-section data showing high-income households have a higher propensity to save. The model also explains why consumption inequality is less than income inequality.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09538250903391954
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 22 (2010)
Issue (Month): 1 ()
Pages: 41-56

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Handle: RePEc:taf:revpoe:v:22:y:2010:i:1:p:41-56

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Cited by:
  1. Yun K. Kim & Mark Setterfield & Yuan Mei, 2014. "A theory of aggregate consumption," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 11(1), pages 31-49, April.
  2. Christian Belabed & Thomas Theobald & Till van Treeck, 2013. "Income Distribution and Current Account Imbalances," INET Research Notes 36, Institute for New Economic Thinking (INET).
  3. Sweet, Elizabeth & Nandi, Arijit & Adam, Emma K. & McDade, Thomas W., 2013. "The high price of debt: Household financial debt and its impact on mental and physical health," Social Science & Medicine, Elsevier, vol. 91(C), pages 94-100.
  4. Thomas I. Palley, 2013. "Gattopardo economics: The crisis and the mainstream response of change that keeps things the same," IMK Working Paper 112-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. Jan Behringer & Till van Treeck, 2013. "Income distribution and current account: A sectoral perspective," IMK Working Paper 125-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  6. Till van Treeck, 2012. "Did inequality cause the U.S. financial crisis?," IMK Working Paper 91-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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