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

  • Thomas I. Palley

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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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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  1. Dirk Krueger & Fabrizio Perri, 2005. "Does income inequality lead to consumption equality? evidence and theory," Staff Report 363, Federal Reserve Bank of Minneapolis.
  2. Blanchflower, David G. & Oswald, Andrew J., 2004. "Well-being over time in Britain and the USA," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1359-1386, July.
  3. Simon Kuznets & Lillian Epstein & Elizabeth Jenks, 1946. "National Product Since 1869," NBER Books, National Bureau of Economic Research, Inc, number kuzn46-1, August.
  4. 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.
  5. 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.
  6. Thomas I. Palley, 1993. "Under-Consumption and the Accumulation Motive," Review of Radical Political Economics, Union for Radical Political Economics, vol. 25(1), pages 71-86, March.
  7. Christopher D Carroll, 1997. "Why Do the Rich Save So Much?," Economics Working Paper Archive 388, The Johns Hopkins University,Department of Economics.
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