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

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  • Thomas Palley

Abstract

This paper presents a theory of consumption that synthesizes the seminal contributions of Keynes (1936), Duesenberry (1948), and Friedman (1957). The model is labeled the '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 for aggregate consumption and empirical findings from cross-section data showing high-income households have a higher propensity to save. The model also explains why consumption inequality is less than income inequality.

Suggested Citation

  • Thomas Palley, 2010. "The Relative Permanent Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model," Review of Political Economy, Taylor & Francis Journals, vol. 22(1), pages 41-56.
  • Handle: RePEc:taf:revpoe:v:22:y:2010:i:1:p:41-56
    DOI: 10.1080/09538250903391954
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    Citations

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    Cited by:

    1. Setterfield, Mark & Kim, Yun K., 2016. "Debt servicing, aggregate consumption, and growth," Structural Change and Economic Dynamics, Elsevier, vol. 36(C), pages 22-33.
    2. Till Treeck, 2014. "Did Inequality Cause The U.S. Financial Crisis?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 421-448, July.
    3. Jan Behringer & Till van Treeck, 2013. "Income distribution and current account: A sectoral perspective," IMK Working Paper 125-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Rodica IANOLE & Elena DRUICA, 2015. "Testing the Keynesian consumption hypothesis on European panel data," Romanian Journal of Economics, Institute of National Economy, vol. 40(1(49)), pages 49-71, june.
    5. Christian A. Belabed & Thomas Theobald & Till van Treeck, 2013. "Income Distribution and Current Account Imbalances," IMK Working Paper 126-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Jakob Kapeller & Bernhard Schütz, 2015. "Conspicuous Consumption, Inequality and Debt: The Nature of Consumption-driven Profit-led Regimes," Metroeconomica, Wiley Blackwell, vol. 66(1), pages 51-70, February.
    7. Christian Alexander Belabed, 2015. "Income Distribution and the Great Depression," IMK Working Paper 153-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Yun K. Kim & Mark Setterfield & Yuan Mei, 2014. "A theory of aggregate consumption," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 31-49, April.
    9. Till van Treeck, 2012. "Did inequality cause the U.S. financial crisis?," IMK Working Paper 91-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Thomas I. Palley, 2013. "Gattopardo economics: the crisis and the mainstream response of change that keeps things the same," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 10(2), pages 193-206.
    11. Sweet, Elizabeth & Nandi, Arijit & Adam, Emma K. & McDade, Thomas W., 2013. "The high price of debt: Household financial debt and its impact on mental and physical health," Social Science & Medicine, Elsevier, vol. 91(C), pages 94-100.
    12. Steven Pressman, 2014. "Keynes, family allowances, and Keynesian economic policy," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(4), pages 508-526, October.
    13. Steven Pressman, 2014. "Keynes, Family allowances and Keynesian economic policy," LIS Working papers 616, LIS Cross-National Data Center in Luxembourg.
    14. Thomas I. Palley, 2017. "The general theory at 80: reflections on the history and enduring relevance of Keynes? economics," FMM Working Paper 07-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. van Treeck, Till. & Sturn, Simon., 2012. "Income inequality as a cause of the Great Recession? : A survey of current debates," ILO Working Papers 994709343402676, International Labour Organization.
    16. repec:ine:journl:v:40:y:2015:i:49:p:21-44 is not listed on IDEAS
    17. Laura Carvalho & Armon Rezai, 2016. "Personal income inequality and aggregate demand," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 491-505.

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