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A Reinterpretation of the Keynesian Consumption Function and Multiplier Effect

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  • Ryu-ichiro Murota
  • Yoshiyasu Ono

Abstract

We propose a microeconomic foundation of the multiplier effect and that of the consumption function using a dynamic optimization model that explains a shortage of aggregate demand and unemployment. We show that government purchases boost aggregate demand through a multiplier-like process but that the implication is quite different. It works through not an increase in disposable income but moderation of deflation, which makes money holding costly and stimulates consumption.

Suggested Citation

  • Ryu-ichiro Murota & Yoshiyasu Ono, 2010. "A Reinterpretation of the Keynesian Consumption Function and Multiplier Effect," ISER Discussion Paper 0779, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0779
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    References listed on IDEAS

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    1. Benassy, Jean-Pascal, 2007. "IS-LM and the multiplier: A dynamic general equilibrium model," Economics Letters, Elsevier, vol. 96(2), pages 189-195, August.
    2. Ryu‐ichiro Murota & Yoshiyasu Ono, 2012. "Zero Nominal Interest Rates, Unemployment, Excess Reserves And Deflation In A Liquidity Trap," Metroeconomica, Wiley Blackwell, vol. 63(2), pages 335-357, May.
    3. Benassy, Jean-Pascal, 2007. "Ricardian equivalence and the intertemporal Keynesian multiplier," Economics Letters, Elsevier, vol. 94(1), pages 118-123, January.
    4. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    5. Yoshiyasu Ono & Kazuo Ogawa & Atsushi Yoshida, 2004. "The Liquidity Trap And Persistent Unemployment With Dynamic Optimizing Agents: Empirical Evidence," The Japanese Economic Review, Japanese Economic Association, vol. 55(4), pages 355-371, December.
    6. Ryu‐ichiro Murota & Yoshiyasu Ono, 2011. "Growth, Stagnation And Status Preference," Metroeconomica, Wiley Blackwell, vol. 62(1), pages 122-149, February.
    7. Matthew D. Shapiro & Joel Slemrod, 2009. "Did the 2008 Tax Rebates Stimulate Spending?," American Economic Review, American Economic Association, vol. 99(2), pages 374-379, May.
    8. Martin Feldstein, 2009. "Rethinking the Role of Fiscal Policy," American Economic Review, American Economic Association, vol. 99(2), pages 556-559, May.
    9. Luís F. Costa & Huw Dixon, 2009. "Fiscal Policy under Imperfect Competition: A Survey," Working Papers Department of Economics 2009/25, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    10. Yoshiyasu Ono & Junichiro Ishida, 2009. "Nominal Wage Adjustment, Demand Shortage and Economic Policy," ISER Discussion Paper 0760, Institute of Social and Economic Research, Osaka University.
    11. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
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    Cited by:

    1. Schoder, Christian, 2017. "Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 46-63.
    2. Christian Schoder, 2015. "A Keynesian Dynamic Stochastic Labor-Market Disequilibrium model for business cycle analysis," IMK Working Paper 157-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Christian Schoder, 2015. "Methodological, internal and ontological inconsistencies in the conventional micro-foundation of post-Keynesian theory," Working Papers 1518, New School for Social Research, Department of Economics.

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