Australian Consumption and Saving
The paper examines the empirical determinants of consumption in Australia in the post-war period. The model provides an influential function for assets and suggests that the success of inflation in explaining the increase in the official saving ratio in the 1970s can be traced to its role in mimicking asset effects. The modeling and stylistic facts suggest that credit conditions, unemployment and income changes are important in explaining short-run movements in consumption. The fact that parameters were constant, even in a variant of the estimated model in which expectations were removed, suggests the unimportance of the Lucas critique. Orthodox life-cycle theory received only equivocal support. Demographics still play a role, but they are much weaker than would be implied by a model in which young risk-neutral agents can borrow freely to consume in advance of future income. Copyright 1994 by Oxford University Press.
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