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A Theory of Aggregate Consumption

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  • Yun Kim

    () (Department of Economics, Trinity College)

  • Mark Setterfield

    () (Department of Economics, Trinity College)

  • Yuan Mei

    () (Department of Economics, University of Chicago)

Abstract

We develop a Keynesian model of aggregate consumption. Our theory emphasizes the importance of the relative income hypothesis and debt-finance for understanding household consumption behavior. It is shown that particular importance attaches to how net debtor households service their debts, and that the treatment of debt servicing commitments as a substitute for savings by these households creates the potential for “sudden stops” in consumption spending (and hence aggregate demand). The implications for aggregate consumption of changes in the distribution of income and changes in the composition of employment are also explored.

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File URL: http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-01.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1301.

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Length: 29 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:tri:wpaper:1301

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Web page: http://www.trincoll.edu/Academics/MajorsAndMinors/Economics/Pages/default.aspx
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Keywords: Consumption; household borrowing; household debt; relative income hypothesis;

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References

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  23. Mark Setterfield, 2012. "Real Sector Imbalances and the Great Recession," Working Papers 1201, Trinity College, Department of Economics.
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