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The Effect of Current Income on Aggregate Consumption

Author

Listed:
  • Manisha Chakrabarty

    (University of Bonn)

  • Anke Schmalenbach

    (University of Bonn)

Abstract

Using the statistical distributional approach of aggregation by Hildenbrand and Kneip (1999, 2002), this paper attempts to find out to what extent current labour income can explain the relative change in aggregate consumption expenditure. The coefficients of the changes in the income distribution are estimated as an average derivative of the cross-section Engel curve. We use the UK-FES [1974-1993] to estimate these coefficients separately for each year by a nonparametric estimation procedure. It is found that the change in current labour income plays a significant role for the commodity groups services and total nondurable, thereby contradicting the implications of the traditional life-cycle/permanent income hypothesis. For services the inclusion of dispersion in addition to the mean of the income distribution improves the goodness-of-fit of the model.

Suggested Citation

  • Manisha Chakrabarty & Anke Schmalenbach, 2002. "The Effect of Current Income on Aggregate Consumption," The Economic and Social Review, Economic and Social Studies, vol. 33(3), pages 297-317.
  • Handle: RePEc:eso:journl:v:33:y:2002:i:3:p:297-317
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    File URL: http://www.esr.ie/Vol33_3Chakrabart.pdf
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    References listed on IDEAS

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    1. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
    2. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    3. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-1137, December.
    4. repec:fth:harver:1466 is not listed on IDEAS
    5. Blundell, Richard & Stoker, Thomas M., 2007. "Models of Aggregate Economic Relationships that Account for Heterogeneity," Handbook of Econometrics,in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 68 Elsevier.
    6. Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 631-649.
    7. Hildenbrand, Werner, 1998. "How relevant are specifications of behavioral relations on the micro-level for modelling the time path of population aggregates?," European Economic Review, Elsevier, vol. 42(3-5), pages 437-458, May.
    8. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    9. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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    Cited by:

    1. Guha Brishti & Guha Ashok S, 2008. "Target Saving in an Overlapping Generations Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-26, March.
    2. Ashok S. Guha & Brishti Guha, 2005. "Future Targets and Multiple Equilibria," Macroeconomics Working Papers 22423, East Asian Bureau of Economic Research.
    3. J├╝rgen Arns & Kaushik Bhattacharya, 2005. "Modelling Aggregate Consumption Growth with Time-Varying Parameters," Bonn Econ Discussion Papers bgse15_2005, University of Bonn, Germany.

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