| Abstract: |
In the Keynesian consumption function, current income is asserted to be the
main determinant of consumption. This paper examines the extent to which the
Keynesian consumption function explains 1960 - 2000 U.S. consumption patterns.
The results are compared to the longer term average income variables suggested
by Friedman's Permanent income Hypothesis and Ando and Modigliani's Life Cycle
Hypothesis as the income variable affecting consumption. We find variance
explained by the consumption function drops dramatically when multi-year
average incomes are substituted for the Keynesian current income variable.
However, when added to the Keynesian function as a second income variable,
they increase explained variance from 88% to 90%, compared to the Keynesian
income variable alone. This small amount suggests that their may be a small
portion of the U.S. population whose consumption decisions follow the more
complex formulations suggested by the Permanent Income and Life Cycle
hypotheses, while the simpler current income formulation used by Keynes
appears to characterize the consumption function of most of the population. |