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Consumption and Investment

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Andrew B. Abel

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Abstract

This paper presents an overview of current models of consumption and investment behavior. First, the stochastic implications of the permanent income model and empirical tests of these implications are discussed. Then the simple theoretical model is extended to include expenditure on consumer durables. In addition, the implications of liquidity constraints and the unpredictability of the rate of return on wealth are discussed. The overview of consumption behavior closes with a critical discussion of the Ricardia Equivalence Theorem. Investment behavior is analyzed using a dynamic optimization model of a firm facing costs of adjustment. This framework integrates the accelerator model, the neoclassical model and the q theory. The model is then used to analyze the interaction of corporate taxes, inflation and investment and also to analyze the effects of uncertainty on investment. The overview of investment concludes with a discussion of inventory investment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2580.

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Date of creation: Apr 1988
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Handle: RePEc:nbr:nberwo:2580

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  1. Nihal Bayraktar & Plutarchos Sakellaris & Philip Vermeulen, 2005. "Real versus financial frictions to capital investment," Working Paper Series 566, European Central Bank. [Downloadable!]
  2. Alfredo Martín-Oliver & Vicente Salas-Fumas, 2007. "How do intangible assets create economic value? an application to banks," Banco de España Working Papers 0730, Banco de España. [Downloadable!]
  3. Arrau, Patricio, 1990. "How does the debt crisis affect investment and growth? : a neoclassical growth model applied to Mexico," Policy Research Working Paper Series 378, The World Bank. [Downloadable!]
  4. Bayraktar, Nihal & Fofack, Hippolyte, 2007. "Specification of investment functions in Sub-Saharan Africa," Policy Research Working Paper Series 4171, The World Bank. [Downloadable!]
  5. Francois Gourio & Jianjun Miao, 2006. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-160, Boston University - Department of Economics. [Downloadable!]
  6. Alan L. Olmstead & Paul W. Rhode, 2000. "The diffusion of the tractor in American Agriculture: 1910-1960," ICER Working Papers 13-2000, ICER - International Centre for Economic Research. [Downloadable!]
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  7. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75. [Downloadable!]
  8. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada. [Downloadable!]
  9. Paul Hiebert & Massimo Rostagno & Javier J. Perez, 2002. "Debt reduction and automatic stabilisation," Working Paper Series 189, European Central Bank. [Downloadable!]
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  10. Herrendorf, Berthold & Valentinyi, Akos, 2001. "Determinacy with Capital Adjustment Costs and Sector-Specific Externalities," CEPR Discussion Papers 2665, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Magni, Carlo Alberto, 2005. "Economic profit, NPV, and CAPM: Biases and violations of Modigliani and Miller's Proposition I," MPRA Paper 6359, University Library of Munich, Germany, revised 22 Jun 2008. [Downloadable!]
  12. Magni, Carlo Alberto, 2003. "Opportunity cost, excess profit and counterfactual conditionals," MPRA Paper 5695, University Library of Munich, Germany. [Downloadable!]
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  13. Luis H. R. Alvarez & Erkki Koskela, 2005. "Optimal Harvesting under Resource Stock and Price Uncertainty," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  14. Goergen, M. & Renneboog, L.D.R., 2000. "Investment policy, internal financing and ownership concentration in the UK," Discussion Paper 116, Tilburg University, Center for Economic Research. [Downloadable!]
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  15. Abdelhak S. Senhadji, 2000. "How Significant are Departures from Certainty Equivalence? Some Analytical and Empirical Results," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 597-617, July. [Downloadable!] (restricted)
  16. Magni, Carlo Alberto, 2007. "Investment decisions, net present value and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany. [Downloadable!]
  17. Erkki Koskela & Rune Stenbacka, 2000. "Bank mergers and the fragility of loan markets," Finnish Economic Papers, Finnish Economic Association, vol. 13(1), pages 3-18, Spring. [Downloadable!]
  18. Russell Cooper & John Haltiwanger & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September. [Downloadable!] (restricted)
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  19. Luis H. R. Alvarez & Erkki Koskela, 2004. "Taxation and Rotation Age under Stochastic Forest Stand Value," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  20. Robert E. Hall, 1999. "The Stock Market and Capital Accumulation," NBER Working Papers 7180, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Plamen Yossifov & Udaibir S. Das & Vasudevan Sundararajan, 2003. "Cross-Country and Cross-Sector Analysis of Transparency of Monetary and Financial Policies," IMF Working Papers 03/94, International Monetary Fund. [Downloadable!]
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