The Relative Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model
AbstractThis 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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Bibliographic InfoPaper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp170.
Date of creation: 2008
Date of revision:
Consumption; permanent income; relative income; Keynes; Duesenberry; Friedman;
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-10 (All new papers)
- NEP-MAC-2008-05-10 (Macroeconomics)
- NEP-PKE-2008-05-10 (Post Keynesian Economics)
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