CONSUMPTION THEORY(Bank of England)

Handbooks in Central Banking

Emilio Fernandez-Corugedo July 2004 48页

Contents
1 Introduction 2
2 Consumption: key theories and terminology 2
2.1 The absolute income hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 The permanent income hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 The life cycle hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Box A: Understanding consumption terminology 6
3 Rational expectations, unit roots and poor forecasting 9
4 The rational expectations permanent income hypothesis 10
Box B: The impact of interest rates on consumption 12
Box C: The role of assumptions in REPI 13
5 Departing fromREPI 13
5.1 Breaking certainty equivalence: precautionary saving . . . . . . . . . . . . . . . . . . 14
5.1.1 The buffer stockmodel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.2 Near rationality and aggregation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2.1 Near rationality and the updating of consumption decisions . . . . . . . . . . 17
5.2.2 Near rationality and imperfect information . . . . . . . . . . . . . . . . . . . 19
5.3 Liquidity constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.4 Habits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.5 Finite lives and REPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Box D: Risk aversion and prudence 25
6 Other consumption issues 27
6.1 Durables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.2 Aggregation issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7 Conclusions and suggestions for further reading 30
A The derivation of the Euler equation 32
B Innovations in consumption and labour income: tests for excess sensitivity and
smoothness 33
B.1 Testing for excess sensitivity and smoothness . . . . . . . . . . . . . . . . . . . . . . 33
B.1.1 Excess sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
B.1.2 Excess smoothness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
C The substitution, income and wealth revaluation effects; the two period case
with diagrams 35
D Taylor-series expansion of the habit model 37