An Augmented UK Private Expenditure Function

Bill Martin

Working Papers from Centre for Business Research, University of Cambridge

Abstract: This paper re-examines the UK private sector expenditure function invented in the 1970s by the 'New Cambridge' School of economists led by Wynne Godley. Evidence is found that helps to justify the New Cambridge focus on a private sector aggregate. More problematic is the School's basic axiom that posits a simple long-run target norm for private financial wealth in relation to income. The wealth to income ratio is instead subject to shifting trends and persistent oscillations. One explanation is that the private sector chooses between investments in financial and non-financial assets on the basis of competing expected rates of return. These returns are not easily measured but experimentation with a proxy leads to a tentative augmented private expenditure function with interesting attributes. These include a stable steady-state ratio of financial wealth to income granted unchanging relative rates of return. Preliminary results reveal a powerful connection between UK private expenditure and house prices.

Keywords: New Cambridge; private sector expenditure function; consumption; investment; wealth (search for similar items in EconPapers)
JEL-codes: E12 E20 E21 E22 (search for similar items in EconPapers)
Date: 2009-03
Note: PRO-2
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Persistent link: https://EconPapers.repec.org/RePEc:cbr:cbrwps:wp384

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