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The Relative Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model

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  • Thomas I. Palley

Abstract

This paper presents a theoretical model of consumption behavior that synthesizes the seminal contributions of Keynes (1936), Friedman (1956) and Duesenberry (1948). The model is labeled a “relative permanent income” theory of consumption. The key feature is that the share of permanent income devoted to consumption is a negative function of household relative permanent income. The model generates patterns of consumption spending consistent with both long-run time series data and modern empirical findings that high-income households have a higher propensity to save. It also explains why consumption inequality is less than income inequality.

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File URL: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_151-200/WP170.pdf
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Bibliographic Info

Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp170.

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Date of creation: 2008
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Handle: RePEc:uma:periwp:wp170

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Keywords: Consumption; permanent income; relative income; Keynes; Duesenberry; Friedman;

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References

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  1. Dirk Krueger & Fabrizio Perri, 2002. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," NBER Working Papers 9202, National Bureau of Economic Research, Inc.
  2. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
  3. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2001. "How Much Do We Care About Absolute Versus Relative Income and Consumption?," Working Papers in Economics 63, University of Gothenburg, Department of Economics.
  4. Christopher D Carroll, 1997. "Why Do the Rich Save So Much?," Economics Working Paper Archive 388, The Johns Hopkins University,Department of Economics.
  5. Simon Kuznets & Lillian Epstein & Elizabeth Jenks, 1946. "National Product Since 1869," NBER Books, National Bureau of Economic Research, Inc, number kuzn46-1, octubre-d.
  6. Robert H. Frank, 2005. "Positional Externalities Cause Large and Preventable Welfare Losses," American Economic Review, American Economic Association, vol. 95(2), pages 137-141, May.
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Cited by:
  1. Sadiye Baykara & Erdinç Telatar, 2012. "The Stationarity Of Consumption-Income Ratios With Nonlinear And Asymmetric Unit Root Tests: Evidence From Fourteen Transition Economies," Hacettepe University Department of Economics Working Papers 20129, Hacettepe University, Department of Economics.
  2. Himayatullah Khan, 2014. "An Empirical Investigation of Consumption Function under Relative Income Hypothesis: Evidence from Farm Households in Northern Pakistan," International Journal of Economic Sciences, University of Economics, Prague, vol. 2014(2), pages 43-52.

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