Intertemporal Choice
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Chapter 17: Consumption 1
11/6/2013 Keynes’s conjectures Chapter 17: Consumption 1. 0 < MPC < 1 2. Average propensity to consume (APC) falls as income rises. (APC = C/Y ) 3. Income is the main determinant of consumption. CHAPTER 17 Consumption 0 CHAPTER 17 Consumption 1 The Keynesian consumption function The Keynesian consumption function As income rises, consumers save a bigger C C fraction of their income, so APC falls. CCcY CCcY c c = MPC = slope of the 1 CC consumption APC c C function YY slope = APC Y Y CHAPTER 17 Consumption 2 CHAPTER 17 Consumption 3 Early empirical successes: Problems for the Results from early studies Keynesian consumption function . Households with higher incomes: . Based on the Keynesian consumption function, . consume more, MPC > 0 economists predicted that C would grow more . save more, MPC < 1 slowly than Y over time. save a larger fraction of their income, . This prediction did not come true: APC as Y . As incomes grew, APC did not fall, . Very strong correlation between income and and C grew at the same rate as income. consumption: . Simon Kuznets showed that C/Y was income seemed to be the main very stable in long time series data. determinant of consumption CHAPTER 17 Consumption 4 CHAPTER 17 Consumption 5 1 11/6/2013 The Consumption Puzzle Irving Fisher and Intertemporal Choice . The basis for much subsequent work on Consumption function consumption. C from long time series data (constant APC ) . Assumes consumer is forward-looking and chooses consumption for the present and future to maximize lifetime satisfaction. Consumption function . Consumer’s choices are subject to an from cross-sectional intertemporal budget constraint, household data a measure of the total resources available for (falling APC ) present and future consumption. -
Toward a Theory of Intertemporal Policy Choice Alan M. Jacobs
Democracy, Public Policy, and Timing: Toward a Theory of Intertemporal Policy Choice Alan M. Jacobs Department of Political Science University of British Columbia C472 – 1866 Main Mall Vancouver, B.C. V6T 1Z1 [email protected] DRAFT: DO NOT CITE Presented at the Annual Conference of the Canadian Political Science Association, June 3-5, 2004, at the University of Manitoba, Winnipeg. In the title to a 1950 book, Harold Lasswell provided what has become a classic definition of politics: “Who Gets What, When, How.”1 Lasswell’s definition is an invitation to study political life as a fundamental process of distribution, a struggle over the production and allocation of valued goods. It is striking how much of political analysis – particularly the study of what governments do – has assumed this distributive emphasis. It would be only a slight simplification to describe the fields of public policy, welfare state politics, and political economy as comprised largely of investigations of who gets or loses what, and how. Why and through what causal mechanisms, scholars have inquired, do governments take actions that benefit some groups and disadvantage others? Policy choice itself has been conceived of primarily as a decision about how to pay for, produce, and allocate socially valued outcomes. Yet, this massive and varied research agenda has almost completely ignored one part of Lasswell’s short definition. The matter of when – when the benefits and costs of policies arrive – seems somehow to have slipped the discipline’s collective mind. While we have developed subtle theoretical tools for explaining how governments impose costs and allocate goods at any given moment, we have devoted extraordinarily little attention to illuminating how they distribute benefits and burdens over time. -
The National Income Multiplier: Its Theory Its Philosophy Its Utility
University of Montana ScholarWorks at University of Montana Graduate Student Theses, Dissertations, & Professional Papers Graduate School 1959 The national income multiplier: Its theory its philosophy its utility John Colin Jones The University of Montana Follow this and additional works at: https://scholarworks.umt.edu/etd Let us know how access to this document benefits ou.y Recommended Citation Jones, John Colin, "The national income multiplier: Its theory its philosophy its utility" (1959). Graduate Student Theses, Dissertations, & Professional Papers. 8768. https://scholarworks.umt.edu/etd/8768 This Thesis is brought to you for free and open access by the Graduate School at ScholarWorks at University of Montana. It has been accepted for inclusion in Graduate Student Theses, Dissertations, & Professional Papers by an authorized administrator of ScholarWorks at University of Montana. For more information, please contact [email protected]. THE NATIOHAL INCOME MULTIPLIER; ITS THEORY, ITS PHILOSOPHY, ITS UTILITY J» COLIN H. JONES B.A. University of WaJes^ U.C.W., Aberystwyth, 195Ô Presented in partial fulfillment of the requirements for the degree of Master of Arts MONTANA STATE UNIVERSITY 1959 Approved by: , Board of Examiners Dean, Graduate School AUG 6 1959 D a te UMI Number: EP39569 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMI Dis»art«t)on Publishsng UMI EP39569 Published by ProQuest LLC (2013). -
ECON 302: Intermediate Macroeconomic Theory (Fall 2014)
ECON 302: Intermediate Macroeconomic Theory (Fall 2014) Discussion Section 2 September 19, 2014 SOME KEY CONCEPTS and REVIEW CHAPTER 3: Credit Market Intertemporal Decisions • Budget constraint for period (time) t P ct + bt = P yt + bt−1 (1 + R) Interpretation of P : note that the unit of the equation is dollar valued. The real value of one dollar is the amount of goods this one dollar can buy is 1=P that is, the real value of bond is bt=P , the real value of consumption is P ct=P = ct. Normalization: we sometimes normalize price P = 1, when there is no ination. • A side note for income yt: one may associate yt with `t since yt = f (`t) here that is, output is produced by labor. • Two-period model: assume household lives for two periods that is, there are t = 1; 2. Household is endowed with bond or debt b0 at the beginning of time t = 1. The lifetime income is given by (y1; y2). The decision variables are (c1; c2; b1; b2). Hence, we have two budget-constraint equations: P c1 + b1 = P y1 + b0 (1 + R) P c2 + b2 = P y2 + b1 (1 + R) Combining the two equations gives the intertemporal (lifetime) budget constraint: c y b (1 + R) b c + 2 = y + 2 + 0 − 2 1 1 + R 1 1 + R P P (1 + R) | {z } | {z } | {z } | {z } (a) (b) (c) (d) (a) is called real present value of lifetime consumption, (b) is real present value of lifetime income, (c) is real present value of endowment, and (d) is real present value of bequest. -
The Intertemporal Keynesian Cross
The Intertemporal Keynesian Cross Adrien Auclert Matthew Rognlie Ludwig Straub February 14, 2018 PRELIMINARY AND INCOMPLETE,PLEASE DO NOT CIRCULATE Abstract This paper develops a novel approach to analyzing the transmission of shocks and policies in many existing macroeconomic models with nominal rigidities. Our approach is centered around a network representation of agents’ spending patterns: nodes are goods markets at different times, and flows between nodes are agents’ marginal propensities to spend income earned in one node on another one. Since, in general equilibrium, one agent’s spending is an- other agent’s income, equilibrium demand in each node is described by a recursive equation with a special structure, which we call the intertemporal Keynesian cross (IKC). Each solution to the IKC corresponds to an equilibrium of the model, and the direction of indeterminacy is given by the network’s eigenvector centrality measure. We use results from Markov chain potential theory to tightly characterize all solutions. In particular, we derive (a) a generalized Taylor principle to ensure bounded equilibrium determinacy; (b) how most shocks do not af- fect the net present value of aggregate spending in partial equilibrium and nevertheless do so in general equilibrium; (c) when heterogeneity matters for the aggregate effect of monetary and fiscal policy. We demonstrate the power of our approach in the context of a quantitative Bewley-Huggett-Aiyagari economy for fiscal and monetary policy. 1 Introduction One of the most important questions in macroeconomics is that of how shocks are propagated and amplified in general equilibrium. Recently, shocks that have received particular attention are those that affect households in heterogeneous ways—such as tax rebates, changes in monetary policy, falls in house prices, credit crunches, or increases in economic uncertainty or income in- equality. -
Intertemporal Choice and Competitive Equilibrium
Intertemporal Choice and Competitive Equilibrium Kirsten I.M. Rohde °c Kirsten I.M. Rohde, 2006 Published by Universitaire Pers Maastricht ISBN-10 90 5278 550 3 ISBN-13 978 90 5278 550 9 Printed in The Netherlands by Datawyse Maastricht Intertemporal Choice and Competitive Equilibrium PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Universiteit Maastricht, op gezag van de Rector Magni¯cus, prof. mr. G.P.M.F. Mols volgens het besluit van het College van Decanen, in het openbaar te verdedigen op vrijdag 13 oktober 2006 om 14.00 uur door Kirsten Ingeborg Maria Rohde UMP UNIVERSITAIRE PERS MAASTRICHT Promotores: Prof. dr. P.J.J. Herings Prof. dr. P.P. Wakker Beoordelingscommissie: Prof. dr. H.J.M. Peters (voorzitter) Prof. dr. T. Hens (University of ZÄurich, Switzerland) Prof. dr. A.M. Riedl Contents Acknowledgments v 1 Introduction 1 1.1 Intertemporal Choice . 2 1.2 Intertemporal Behavior . 4 1.3 General Equilibrium . 5 I Intertemporal Choice 9 2 Koopmans' Constant Discounting: A Simpli¯cation and an Ex- tension to Incorporate Economic Growth 11 2.1 Introduction . 11 2.2 The Result . 13 2.3 Related Literature . 18 2.4 Conclusion . 21 2.5 Appendix A. Proofs . 21 2.6 Appendix B. Example . 25 3 The Hyperbolic Factor: a Measure of Decreasing Impatience 27 3.1 Introduction . 27 3.2 The Hyperbolic Factor De¯ned . 30 3.3 The Hyperbolic Factor and Discounted Utility . 32 3.3.1 Constant Discounting . 33 3.3.2 Generalized Hyperbolic Discounting . 33 3.3.3 Harvey Discounting . 34 i Contents 3.3.4 Proportional Discounting . -
Intertemporal Consumption and Savings Behavior: Neoclassical, Behavioral, and Neuroeconomic Approaches
Intertemporal Consumption and Savings Behavior: Neoclassical, Behavioral, and Neuroeconomic Approaches Joshua J. Kim June 2014 Abstract This paper summarizes neoclassical, behavioral, and neuroeconomic models of intertemporal consumption and savings behavior. I summarize the construction and implications of Modigliani & Brumberg's Life-Cycle Hypothesis [4] and Laibson's quasi-hyperbolic consumption function [8] as background and motivation for Bisin & Benhabib's neuroeconomic model of dynamic consumption behavior [3]. In particular, I focus on the mathe- matical construction of each model, their different behavioral assumptions of agent rationality, and the resulting implications for economic theory. 1 The Neoclassical Life-Cycle Hypothesis The development of modern economic theories analyzing intertemporal consumption began in the early 1950s with the publication of Modigliani & Brumberg's Life-cycle Hypothesis (LCH) [4]. By making several arguably innocuous assumptions, Modigliani & Brumberg produce several important and non-trival predictions about macroeconomic processes such as the relationship in aggregate economics between savings and growth. Furthermore, since its construction, the LCH has served as the standard economic approach to the study of consumption and savings behavior and has served as a foundational basis for subsequent models of intertemporal consumption. The structure of the rest of this chapter is as follows: subsection 1.1 presents the theoretical foundations and assumptions of the LCH. Subsection 1.2 discusses some of the implications and results. Subsection 1.3 concludes the discussion on neoclassical models of intertemporal consumption and discusses several objections and limitations of the LCH. 1 1.1 Theoretical Foundations Before we begin the construction of the life-cycle hypothesis, let us first define a few terms that readers unfamiliar with economic theory may not know. -
On the Concept of Nudging: Its Coherence and Applicability?
On the Concept of Nudging: Its Coherence and Applicability? Mads Wistrup Freund September 15, 2017 25-June-1993-xxxx MSc in Business Administration and Philosophy Vejleder: Marius Gudman Høyer 1 Abstract The practice of nudging has attracted attention from researchers, policymakers, and practitioners alike. The contemporary interest in nudging has sparked demands for a clearer examination of the conditions under which nudging and other behavioral methods can be used efficiently and acceptable. There are several unresolved questions which may have contributed to heated political and scientific discussions, especially heated is the ethical discussion of applying nudging in the public policy domain. This thesis concentrate on the philosophical premises nudges are built on. It is argued that the model is philosophically problematic. Different interventions might operate through various logics that threaten not only effectiveness but also representativeness and ethical ends. This thesis aruges that the next step in advancing the acceptability nudging requires a clarification. The thesis investi- gates the internal logic of this practice by exploring the expositions and implications within the literature on nudging in public policy, by specifically exploring its origins in behavioral economics; its impact on welfare policy; and ethical implications. This analysis is guided by Foucaults concept of veridiction and understanding of power. This thesis concludes that nudging would be more acceptable if it clarified that humans, in these models, are treated as defective econs. Choice architects are trying to represent the complex reality of hu- man judgment and decision-making with the inclusion of psychology in a highly simplified normative modeling framework, to increase individuals tendency to act according to neo- classical rational choice models. -
Variable-Time-Preference-He-Et-Al.Pdf
Cognitive Psychology 111 (2019) 53–79 Contents lists available at ScienceDirect Cognitive Psychology journal homepage: www.elsevier.com/locate/cogpsych Variable time preference ⁎ T Lisheng Hea, , Russell Golmanb, Sudeep Bhatiaa,1 a University of Pennsylvania, United States b Carnegie Mellon University, United States ARTICLE INFO ABSTRACT Keywords: We re-examine behavioral patterns of intertemporal choice with recognition that time pre- Decision making ferences may be inherently variable, focusing in particular on the explanatory power of an ex- Intertemporal choice ponential discounting model with variable discount factors – the variable exponential model. We Stochastic choice provide analytical results showing that this model can generate systematically different choice Preference variability patterns from an exponential discounting model with a fixed discount factor. The variable ex- Computational modeling ponential model accounts for the common behavioral pattern of decreasing impatience, which is typically attributed to hyperbolic discounting. The variable exponential model also generates violations of strong stochastic transitivity in choices involving intertemporal dominance. We present the results of two experiments designed to evaluate the variable exponential model in terms of quantitative fit to individual-level choice data. Data from these experiments reveal that allowing for a variable discount factor significantly improves the fit of the exponential model, and that a variable exponential model provides a better account of individual-level choice probabilities than hyperbolic discounting models. In a third experiment we find evidence of strong stochastic transitivity violations when intertemporal dominance is involved, in accordance with the variable exponential model. Overall, our analytical and experimental results indicate that exponential discounting can explain intertemporal choice behavior that was supposed to be beyond its descriptive scope if the discount factor is permitted to vary at random. -
How Do Income and the Debt Position of Households Propagate Public Into Private Spending?
University of Heidelberg Department of Economics Discussion Paper Series No. 676 How Do Income and the Debt Position of Households Propagate Public into Private Spending? Sebastian K. Rüth and Camilla Simon February 2020 How Do Income and the Debt Position of Households Propagate Public into Private Spending? Sebastian K. R¨uth Camilla Simon∗ February 21, 2020 Abstract We study the household sector's post-tax income and debt position as prop- agation mechanisms of public into private spending, in postwar U.S. data. In structural VARs, we obtain the consumption \crowding-in puzzle" for surges in public spending and show this consumption response to be accompanied by a persistent increase in disposable income. Endogenously reacting income, however, is insufficient to rationalize conditional comovement of private and public spending: once we hypothetically force (dis)aggregate measures of in- come to their pre-shock paths, consumption still rises. Corroborating these findings within an external-instruments-identified VAR, which constitutes an adequate laboratory for the simultaneous interplay of financial and macroe- conomic time-series, we provide causal evidence of fiscal stimulus prompting households to take on more credit. This favorable debt cycle is paralleled by dropping interest rates, narrowing credit spreads, and inflating collat- eral prices, e.g., real estate prices, suggesting that softening borrowing con- straints support the accumulation of debt and help rationalizing the absence of crowding-out. Keywords: Government spending shock, household income, household in- debtedness, credit spread, external instrument, fiscal foresight. JEL codes: E30, E62, G51, H31. ∗Respectively: Heidelberg University, Alfred-Weber-Institute for Economics, phone: +49 6221 54 2943, e-mail: [email protected] (corresponding author); University of W¨urzburg,Department of Economics, phone: +49 931 31 85036, e-mail: camilla.simon@uni- wuerzburg.de. -
The Macroeconomic Implications of Consumption: State-Of-Art and Prospects for the Heterodox Future Research
The macroeconomic implications of consumption: state-of-art and prospects for the heterodox future research Lídia Brochier1 and Antonio Carlos Macedo e Silva2 Abstract The recent US economic scenario has motivated a series of heterodox papers concerned with household indebtedness and consumption. Though discussing autonomous consumption, most of the theoretical papers rely on private investment-led growth models. An alternative approach is the so-called Sraffian supermultipler model, which treats long-run investment as induced, allowing for the possibility that other final demand components – including consumption – may lead long-run growth. We suggest that the dialogue between these approaches is not only possible but may prove to be quite fruitful. Keywords: Consumption, household debt, growth theories, autonomous expenditure. JEL classification: B59, E12, E21. 1 PhD Student, University of Campinas (UNICAMP), São Paulo, Brazil. [email protected] 2 Professor at University of Campinas (UNICAMP), São Paulo, Brazil. [email protected] 1 1 Introduction Following Keynes’ famous dictum on investment as the “causa causans” of output and employment levels, macroeconomic literature has tended to depict personal consumption as a well-behaved and rather uninteresting aggregate demand component.3 To be sure, consumption is much less volatile than investment. Does it really mean it is less important? For many Keynesian economists, the answer is – or at least was, until recently – probably positive. At any rate, the American experience has at least demonstrated that consumption is important, and not only because it usually represents more than 60% of GDP. After all, in the U.S., the very ratio between consumption and GDP has been increasing since the 1980s, in spite of the stagnant real labor income and the growing income inequality. -
Macro Model Objectives : Understand the Difference Between Desired
Macro Model Objectives : Understand the difference between desired expenditure and actual expenditure. Explain the determinants of desired consumption and desired investment expeditures. Understand the meaning of equilibrium national income. Recognize the difference between movements along and shifts of the aggregate expenditure functions. Desired expenditure Everyone makes expenditure decisions. Fortunately, it is unnecessary for our purposes to look at each of the millions of such individual decisions. Instead, it is sufficient to consider four main groups of decision makers. The sum of their desired expenditures on domestically produced output is called desired aggregate expenditure, or more simply aggregate expenditure (AE). AE = C + I +G +(X-M) Autonomus versus induced expenditure. Components of aggregate expenditure that do not depend on national income are called autonomous expenditures. Components of aggregate expenditure that do change in response to changes in national income are called induced expenditures. Global Economics : macro model 2 Important simplifications Our goal is to develop the simplest possible model of national-income determination. To do so we focus on only two of the four components of desired aggregate expenditure. Consumption and investment Desired consumption expenditure By definition, there are only two possible uses of disposable income–consumption and saving. W hen the household decides how much to put to one use, it has automatically decided how much to put to the other use. The consumption function relates to total desired consumption expenditures of all households. The consumption behaviour of households depends on the income that they actually have to spend, which is called disposable income. Under the assumptions, here, there are no governments, therefore no taxes.