Research
BPEA | 1985 No. 2The Time Series Consumption Function Revisited
Angus Deaton and
Angus Deaton
Senior Scientist
- Princeton University
Alan Blinder
Alan Blinder
Visiting Fellow
- Economic Studies
Discussants:
Robert E. Hall and
Robert E. Hall
Robert and Carole McNeil Joint Hoover Senior Fellow and Professor of Economics
- Stanford University
R. Glenn Hubbard
R. Glenn Hubbard
Dean and Russell L. Carson Professor of Finance and Economics
- Columbia Business School
1985, No. 2
THE RELATIONSHIP between consumer spending and income is one of the
oldest statistical regularities of macroeconomics-and one of the sturdiest.
Like the aging movie star, it needs a little touching up now and
again, but always seems to come bouncing back.
A dozen years ago, both the theoretical derivation and the econometric
form of the aggregate consumption function were considered settled.
Most economists adhered to one of two ways of putting Fisher’s theory
of intertemporal optimization into operation: Milton Friedman’s permanent
income hypothesis (henceforth, PIH) or Franco Modigliani’s
life-cycle hypothesis (henceforth, LCH). ‘ Since each variant seemed to
have sound theoretical underpinnings, and since the two had similar
econometric forms that explained the data well and had similar implications
for policy, there was not a great deal to quarrel about. Perhaps the
most contentious empirical issue was the apparently large marginal propensity to consume out of transitory income, which was variously
explained by a “short horizon” (that is, a high discount rate) or by
liquidity constraints.