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Consumption Demand

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  • Orazio P. Attanasio

Abstract

Consumption is the largest component of GDP. Since the 1950s, the life cycle and the permanent income models have constituted the main analytical tools to the study of consumption behavior, both at the micro and at the aggregate levels. Since the late 1970s the literature has focused on versions of the model that incorporate the hypothesis of Rational Expectations and a rigorous treatment of uncertainty. In this paper, I survey the most recent contribution and assess where the life cycle model stands. My reading of the evidence and of recent developments leads me to stress two points: (i) the model can only be tested and estimated using a flexible specification of preferences and individual level data; (ii) it is possible to construct versions of the model that are not rejected by the data. One of the main problems of the approach used in the literature to estimate preferences is the lack of a consumption function.' A challenge for future research is to use preference parameter estimates to construct such functions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6466.

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Date of creation: Mar 1998
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Handle: RePEc:nbr:nberwo:6466

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Cited by:
  1. Mario Padula, 2000. "Excess Smoothness and Durable Goods: Evidence from Subjective Expectations Data," CSEF Working Papers 38, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Khoon Lek Goh & Richard Downing, 2002. "Modelling New Zealand Consumption Expenditure over the 1990s," Treasury Working Paper Series 02/19, New Zealand Treasury.
  3. Michael Haliassos & Alexandros Michaelides, 1999. "Portfolio Choice and Liquidity Constraints," University of Cyprus Working Papers in Economics 9918, University of Cyprus Department of Economics.
  4. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.).
  5. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23, October.
  6. Orazio P. Attanasio & Hamish Low, 2004. "Estimating Euler Equations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 405-435, April.
  7. Ricardo M. Sousa, 2003. "Property of stocks and wealth effects on consumption," NIPE Working Papers 2/2003, NIPE - Universidade do Minho.
  8. Bunting, David, 2009. "The saving decline: Macro-facts, micro-behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 282-295, May.
  9. Yash P. Mehra & Elliot W. Martin, 2003. "Why does consumer sentiment predict household spending?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 51-67.
  10. Maria J. Luengo-Prado, 2004. "Durables, Nondurables, Down Payments and Consumption Excesses," Macroeconomics 0408006, EconWPA.
  11. Christopher Farr and Maria J. Luengo-Prado, 2001. "The Implications of Lower Down Payments on Consumption Volatility," Computing in Economics and Finance 2001 196, Society for Computational Economics.
  12. Laura Serlenga, 2002. "Three Alternative Approaches to Test the Permanent Income Hypothesis in Dynamic Panels," series 0005, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Feb 2002.

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