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An Augmented UK Private Expenditure Function

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  • Bill Martin
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    Abstract

    This paper re-examines the UK private sector expenditure function invented in the 1970s by the 'New Cambridge' School of economists led by Wynne Godley. Evidence is found that helps to justify the New Cambridge focus on a private sector aggregate. More problematic is the School's basic axiom that posits a simple long-run target norm for private financial wealth in relation to income. The wealth to income ratio is instead subject to shifting trends and persistent oscillations. One explanation is that the private sector chooses between investments in financial and non-financial assets on the basis of competing expected rates of return. These returns are not easily measured but experimentation with a proxy leads to a tentative augmented private expenditure function with interesting attributes. These include a stable steady-state ratio of financial wealth to income granted unchanging relative rates of return. Preliminary results reveal a powerful connection between UK private expenditure and house prices.

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    Bibliographic Info

    Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp384.

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    Date of creation: Mar 2009
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    Handle: RePEc:cbr:cbrwps:wp384

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    Web page: http://www.cbr.cam.ac.uk/

    Related research

    Keywords: New Cambridge; private sector expenditure function; consumption; investment; wealth;

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