Title: Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence
Abstract: This paper proposes that the time-series data on consumption, income, and interest rates are best viewed as generated not by a single representative consumer but by two groups of consumers. Half the consumers are forward-looking and consume their permanent income, but are extremely reluctant to substitute consumption temporarily. Half the consumers follow the rule of thumb of consuming their current income. The paper documents three empirical regularities that, it argues, are best explained by this medal. First, expected changes in income are associated with expected changes in consumption. Second, expected real interest rates are not associated with expected changes in consumption. Third, periods in which consumption is high relative to income are typically followed by high growth in income. The paper concludes by briefly discussing the implications of these findings for economic policy and economic research.
Publication Year: 1989
Publication Date: 1989-04-01
Language: en
Type: preprint
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot