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James Duesenberry As a Practitioner of Behavioral Economics
Journal of Behavioral Economics for Policy, Vol. 2, No. 1, 13-18, 2018 James Duesenberry as a practitioner of behavioral economics Ken McCormick1* Abstract In 1949 James Duesenberry published Income, saving and the theory of consumer behavior. His objective was to solve a puzzle presented by the macroeconomic data on consumption. To do so, he created the Relative Income Hypothesis. Duesenberry explicitly challenged the neoclassical assumption of independent consumer preferences and made use of ideas that are now common in behavioral economics: loss aversion, status quo bias, spotlight effects, herd behavior, and interdependent preferences. He also raised policy questions about the effect of redistributive taxes on national saving. To answer the questions he raised, we need empirical research by behavioral economists. Finally, the issue arises as to why the Relative Income Hypothesis has virtually disappeared from economics even though it is superior to the Permanent Income Hypothesis that replaced it. JEL Classification: B31; E21; E71 Keywords Duesenberry — Relative Income Hypothesis — independent preferences — saving 1University of Northern Iowa *Corresponding author: [email protected] “State a moral question to a ploughman and a reasons for supposing that preferences are in fact interdepen- professor. The former will decide it as well and dent” (1949, 3). often better than the latter because he has not Duesenberry’s appeal to psychological and sociological been led astray by artificial rules”. evidence marks him as an early practitioner of behavioral economics. In his view, Homo Economicus leads economists THOMAS JEFFERSON (1787) astray. Economists need to work with a more realistic vi- sion of human behavior, one that will provide more accurate Introduction predictions. -
BIS Working Papers No 136 the Price Level, Relative Prices and Economic Stability: Aspects of the Interwar Debate by David Laidler* Monetary and Economic Department
BIS Working Papers No 136 The price level, relative prices and economic stability: aspects of the interwar debate by David Laidler* Monetary and Economic Department September 2003 * University of Western Ontario Abstract Recent financial instability has called into question the sufficiency of low inflation as a goal for monetary policy. This paper discusses interwar literature bearing on this question. It begins with theories of the cycle based on the quantity theory, and their policy prescription of price stability supported by lender of last resort activities in the event of crises, arguing that their neglect of fluctuations in investment was a weakness. Other approaches are then taken up, particularly Austrian theory, which stressed the banking system’s capacity to generate relative price distortions and forced saving. This theory was discredited by its association with nihilistic policy prescriptions during the Great Depression. Nevertheless, its core insights were worthwhile, and also played an important part in Robertson’s more eclectic account of the cycle. The latter, however, yielded activist policy prescriptions of a sort that were discredited in the postwar period. Whether these now need re-examination, or whether a low-inflation regime, in which the authorities stand ready to resort to vigorous monetary expansion in the aftermath of asset market problems, is adequate to maintain economic stability is still an open question. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The views expressed in them are those of their authors and not necessarily the views of the BIS. -
The Relevance of Duesenberry's Relative Income Hypothesis In
Keeping up with the Joneses: the Relevance of Duesenberry’s Relative Income Hypothesis in Ethiopia Tazeb Bisset ( [email protected] ) Dire Dawa University Dagmawe Tenaw Dire Dawa University https://orcid.org/0000-0002-9768-0430 Research Article Keywords: Duesenberry’s demonstration and ratchet effects, relative income, APC, ARDL, Ethiopia Posted Date: October 7th, 2020 DOI: https://doi.org/10.21203/rs.3.rs-83692/v1 License: This work is licensed under a Creative Commons Attribution 4.0 International License. Read Full License Keeping up with the Joneses: the Relevance of Duesenberry’s Relative Income Hypothesis in Ethiopia Tazeb Bisset1 and Dagmawe Tenaw2 Department of Economics Dire Dawa University, Dire Dawa, Ethiopia 1Email: [email protected] 2Email: [email protected] Abstract Although it was mysteriously neglected and displaced by the mainstream consumption theories, the Duesenberry’s relative income hypothesis seems quite relevant to the modern societies where individuals are increasingly obsessed with their social status. Accordingly, this study aims to investigate the relevance of Duesenberry’s demonstration and ratchet effects in Ethiopia using a quarterly data from 1999/2000Q1-2018/19Q4. To this end, two specifications of relative income hypothesis are estimated using Autoregressive Distributed Lag (ARDL) regression model. The results confirm a backward-J shaped demonstration effect. This implies that an increase in relative income induces a steeper reduction in Average Propensity to consume (APC) at lower income groups (the demonstration effect is stronger for lower income households). The results also support the ratchet effect, indicating the importance of past consumption habits for current consumption decisions. In resolving the consumption puzzle, the presence of demonstration and ratchet effects reflects a stable APC in the long-run. -
Saving out of Different Types of Income
LESTER D. TAYLOR* Universityof Michigan Saving out of Diferent Types of Income IT HAS ALWAYSBEEN A SOURCEof professionalpride to me to be able to tell my undergraduatestudents in macro theory that economists know a lot about what makes consumers tick. However, in light of the experience of the past several years, I now state this proposition much more circumspectly, and perhaps should restrain myself altogether. For the fact is that in the last three or four years, the consumer has done few things predicted of him. To be sure, there have been some new elements in the picture: interest rates at the highest levels in a century; a "roaring" inflation, at least by contem- porary U.S. standards; and a temporary tax increase. But even so, the con- sumer seems to have injected his own element of eccentricity. Among other things, he was thrifty in 1967 and the first half of 1968 on a scale then un- precedented for the postwar period. And while he regained his taste for spending in the last half of 1968, it was rather short-lived. For in the third quarter of 1969, the personal saving rate again began to rise, and from the third quarter of 1970 through the second quarter of 1971, was in excess of the unheard-of level of 8 percent. * Computationsand researchassistance supported by the National Science Founda- tion. I am gratefulto membersof the Brookingspanel for commentsand criticisms,to Daniel Weiserbsand Angelo Mascarofor researchassistance, and to Joan Hinterbichler and PatriciaRamsey for secretarialassistance. I have also greatlybenefited from access to an unpublishedpaper of H. -
American Economic Association
American Economic Association /LIH&\FOH,QGLYLGXDO7KULIWDQGWKH:HDOWKRI1DWLRQV $XWKRU V )UDQFR0RGLJOLDQL 6RXUFH7KH$PHULFDQ(FRQRPLF5HYLHZ9RO1R -XQ SS 3XEOLVKHGE\$PHULFDQ(FRQRPLF$VVRFLDWLRQ 6WDEOH85/http://www.jstor.org/stable/1813352 $FFHVVHG Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org Life Cycle, IndividualThrift, and the Wealth of Nations By FRANCO MODIGLIANI* This paper provides a review of the theory Yet, there was a brief but influential inter- of the determinants of individual and na- val in the course of which, under the impact tional thrift that has come to be known as of the Great Depression, and of the interpre- the Life Cycle Hypothesis (LCH) of saving. -
The Relative Income Theory of Consumption: a Synthetic Keynes-Duesenberry- Friedman Model
RESEARCH INSTITUTE POLITICAL ECONOMY The Relative Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model Thomas I. Palley April 2008 Gordon Hall 418 North Pleasant Street Amherst, MA 01002 Phone: 413.545.6355 Fax: 413.577.0261 [email protected] www.peri.umass.edu WORKINGPAPER SERIES Number 170 The Relative Income Theory of Consumption: A Synthetic Keynes-Duesenberry- Friedman Model Abstract 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. JEL ref.: E3 Keywords: Consumption, permanent income, relative income, Keynes, Duesenberry, Friedman. December 2007 1 I Introduction After World War II the theory of consumption became a central focus of research in macroeconomics. With consumption spending making up approximately two-thirds of peacetime GDP and with economists fearful that the economy would fall back into a condition of mass unemployment, this focus was natural. Initially, thinking was dominated by Keynes’ theory of the aggregate consumption function that he had developed in his General Theory (1936). According to Keynes’s theory, aggregate consumption was a positive but diminishing function of aggregate income. James Duesenberry’s 1949 book, Income, Saving and the Theory of Consumer Behavior, challenged Keynes’ construction of consumption behavior by introducing psychological factors associated with habit formation and social interdependencies based on relative income concerns. -
03 Black 1749.Indd
BOB BLACK Robert Denis Collison Black 1922–2008 Early years ROBERT DENIS COLLISON BLACK, Bob Black to an international circle of friends, was born 11 June 1922 at Morehampton Terrace, Dublin.1 His father, William Robert Black, was company secretary for a small group of companies in the grain trade.2 His mother was Rosa Anna Mary, née Reid. Dublin at the time of Black’s birth was experiencing considerable disturbance, though he rarely alluded to this.3 Black was educated at Sandford Park School, Dublin. However he became disenchanted with the school4 and contrived, astonishingly, to enter Trinity College, Dublin at the age of 15. Even more remarkably, he seems to have managed perfectly well as a 15-year old amongst much older students. He managed to complete two undergraduate degree courses. He enrolled for a commerce degree, but Trinity at that time required those 1 The family moved to Waltham Terrace when Black was fi ve. Bob Black gave a long and detailed interview to Antoin Murphy and Renee Prendergast which was published in his Festschrift. See A. Murphy and R. Prendergast (eds.), Contributions to the History of Economic Thought. Essays in Honour of R. D. C. Black (London, 2000), p. 3. 2 Black gave another interview which is recorded in K. Tribe, Economic Careers. Economics and Economists in Britain 1930–1970 (London, 1997). See Tribe, p. 96, for the occupation of Black’s father. The latter was a considerable expert in his fi eld. I can remember Black telling me how he could sniff a handful of grain and detect its origin. -
Microfoundational Programs*
Microfoundational Programs* Kevin D. Hoover Department of Economics and Department of Philosophy Duke University Box 90097 Durham, NC 277080097 Tel. (919) 6601876 Email [email protected] 16 July 2009 (First draft; please do not cite without author’s permission. *Prepared for the First International Symposium on the History of Economic Thought: “The Integration of Micro and Macroeconomics from a Historical Perspective,” University of São Paulo, Brazil, 35 August 2009. Abstract of Microfoundational Programs by Kevin D. Hoover Department of Economics and Department of Philosophy Duke University The substantial questions of macroeconomics itself are very old, going back to the origins of economics itself. But professional selfconsciousness of the distinction between macroeconomics and microeconomics dates only to the 1930s. The distinction was drawn quite independently of Keynes, yet Keynes’s General Theory led to its widespread adoption. The question of the relationship of microeconomics to macroeconomics encapsulated in the question of whether macroeconomics requires microfoundations was not raised for the first time in the 1960s or ‘70s, as is sometimes thought, but goes back to the very foundations of macroeconomics. There are in fact at least three microfoundational programs: a Marshallian program with its roots directly in Keynes’s own theorizing in the General Theory; a fixedprice generalequilibrium theory, which includes some work of Patinkin, Clower, and Barro and Grossman; and the more recent representativeagent microfoundations, starting with Lucas and the new classicals in the early 1970s. This paper will document the development of each of these microfoundational programs and their interrelationship, especially in relationship to the programs of generalequilibrium theory and econometrics, whose modern incarnations both date from exactly the same period in the 1930s. -
2003-08 Meltzer's History of the Federal Reserve David Laidler
Western University Scholarship@Western Department of Economics Research Reports Economics Working Papers Archive 2003 2003-08 Meltzer's History of the Federal Reserve David Laidler Follow this and additional works at: https://ir.lib.uwo.ca/economicsresrpt Part of the Economics Commons Citation of this paper: Laidler, David. "2003-08 Meltzer's History of the Federal Reserve." Department of Economics Research Reports, 2003-8. London, ON: Department of Economics, University of Western Ontario (2003). Meltzer=s History of the Federal Reserve A Review of A History of the Federal Reserve Volume 1: 1913-1951 by Allan H. Meltzer, with a Foreword by Alan Greenspan. Chicago, University of Chicago Press, 2003. pp. 800 + xiii, $75.00 by 1 David Laidler 1The author is Bank of Montreal Professor, in the Department of Economics at the University of Western Ontario. He gratefully acknowledges the Bank=s support of his work. John McMillan, Roger Sandilands and Richard Timberlake made helpful comments on an earlier draft. 1 I Allan Meltzer refers to his History of the Federal Reserve as a biography of an institution, and so it is, in the same way that Milton Friedman and Anna Schwartz=s Monetary History of the United States is the biography of a particular time series: both books deal with the Alife and times@ of their principal subject, with a strong emphasis on the Atimes@. This is the first of a projected two volume set, and covers the same period (roughly speaking) as chapters 5 - 11 of Friedman and Schwartz=s study. Because, however, Meltzer emphasises the economic ideas, institutional factors, and personalities that drove monetary policy over his period, while they stressed the effects of that policy on the behaviour of the money supply, and by that route on the economy, the two works are more complements than substitutes. -
Introduction
Introduction IN JUNE 1943, the International Finance Section at Princeton University pub- lished the first of its Essays in International Finance. It was written by Friedrich A. Lutz and compared the Keynes and White plans for organizing the international monetary system after the Second World War. Soon thereaf- ter, the Section published three more Essays concerned with postwar mone- tary problems, including Ragnar Nurkse's celebrated paper, Conditions of International Monetary Equilibrium. In April 1993, the International Finance Section celebrated the fiftieth birth- day of its Essays by convening a conference at Princeton. The conference reviewed recent research on international monetary issues but also examined policy problems that call for more research. Five sessions were devoted to surveys and assessments of recent research, two panels examined key policy problems, and Paul Krugman concluded the conference with a lecture in which he asked what we know and need to know about the international monetary system. The papers and panelists' presentations are published in this volume. The first of the five sessions on recent research was concerned with exchange- rate behavior and the evolution of exchange-rate arrangements. The second examined recent work on the dynamics of current-account adjustment. The third examined research on capital mobility and international debt. The fourth session dealt with stabilization and liberalization in open economies. The fifth was devoted to research on international policy coordination and on monetary unification. There were discussants at each session, but their comments are not published in this book, because the conference papers have been revised extensively to take account of the discussants' comments. -
Subjective Well-Being: Keeping up with the Joneses. Real Or Perceived?
Subjective Well-Being: Keeping up with the Joneses. Real or Perceived? Cahit Guven ∗ Bent E. Sørensen † University of Houston University of Houston and CEPR November 2007 Abstract Using data from the U.S. General Social Survey, we study the role of income and status in self-reported happiness. Unexpected income gains increase happiness and relative income is more important than absolute income, in particular, income relative to individuals’ own cohort working in the same occupation in the same region. Perceptions about relative income are more important than actual relative income in explaining individual well-being and perceptions about one’s own social class is more important than the actual social class in explaining happiness. Father’s social standing and occupational prestige during childhood decrease current well-being. The results are robust to instrumenting own income with sector level wages or compensation. JEL Classification: D14, D63, I31, Keywords: income shock, relative income, perceptions. ∗Department of Economics, University of Houston, TX, 77204 e-mail: [email protected], tel:713 7433818 †Department of Economics, University of Houston, TX, 77204, e-mail: [email protected], tel: 713 7433841, fax: 713 7433798. The authors thank par- ticipants at the International Conference on Policies for Happiness in Siena, the 76th Annual SEA Meetings, the 11th Texas Econometrics Camp, the 7th Annual Missouri Economics Conference, and seminar participants at Sam Houston State University and the University of Houston for their valuable comments and suggestions. Special thanks to Rainer Winkelmann. 1 Introduction “Happiness is not achieved by the conscious pursuit of happiness; it is generally the by-product of other activities.” Aldous Leonard Huxley (July 26, 1894 - November 22, 1963) British philosopher. -
Artículo Countries in the Hamster's Wheel?: Nurkse-Duesenberry Demonstration Effects and the Determinants of Saving
ARTÍCULO COUNTRIES IN THE HAMSTER’S WHEEL?: NURKSE-DUESENBERRY DEMONSTRATION EFFECTS AND THE DETERMINANTS OF SAVING Andrés Rius Carolina Román Rius, A., & Román, C. (2021). Countries in the hamster’s wheel?: Nurkse- Duesenberry demonstration effects and the determinants of saving. Cuader- nos de Economía, 40(82), 193-225. Throughout the world, stable regional patterns relating to private savings are hard to access. This article revisits the hypothesis that, as there is evidence of emula- tion patterns between consumers, there might be international (macroeconomic) “emulation”. We test demonstration effect theories exploiting international data on savings, incomes, and means of global exposure. We use two methods of media communication given that their penetration peaked at different times in the sam- A. Rius Instituto de Economía, Facultad de Ciencias Económicas y de Administración, Universidad de la República, Montevideo, Uruguay. Correo electrónico: [email protected] C. Román Instituto de Economía, Facultad de Ciencias Económicas y de Administración, Universidad de la República, Montevideo, Uruguay. Correo electrónico: [email protected] Sugerencia de citación: Rius, A., & Román, C. (2021). Countries in the hamster’s wheel?: Nurk- se-Duesenberry demonstration effects and the determinants of saving. Cuadernos de Economía, 40(82), 193-225. doi: https://doi.org/10.15446/cuad.econ.v40n82.78069 Este artículo fue recibido el 25 de febrero de 2019, ajustado el 20 de octubre de 2019 y su publicación aprobada el 25 de octubre de 2019. 193 194 Cuadernos de Economía, 40(82), enero-junio 2021 ple period: TV and internet were a means of discovering foreign consumption standards. With the resulting country panels, we find some evidence in favour of a statistically significant negative association for the demonstration effect.