Aggregate Consumption and Debt Accumulation: An Empirical Examination of US Household Behavior

Yk Kim, Mark Setterfield and Yuan Mei

No 1204, Working Papers from Trinity College, Department of Economics

Abstract: The outbreak of the financial crisis in 2008 witnessed a marked contraction in US consumption spending that had hitherto been boosted by historically high levels of household debt-financing. These events question the validity of conventional models of consumption based on the life-cycle hypothesis, with its benign view of debt as a neutral instrument of optimal intertemporal expenditure smoothing. This paper develops an alternative account of consumption spending based on the Keynesian relative income hypothesis, which claims that current income, its distribution, household borrowing, and household indebtedness all affect current consumption. The paper then provides an empirical investigation of US consumption spending since the 1960s. The results of this inquiry are not compatible with the life-cycle hypothesis, but are congruent with our alternative Keynesian theory of consumption based on the relative income hypothesis.

Keywords: Consumption; household borrowing; household debt; life cycle hypothesis; relative income hypothesis (search for similar items in EconPapers)
JEL-codes: E12 E21 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2012-06
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http://www3.trincoll.edu/repec/WorkingPapers2012/WP12-04.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Aggregate consumption and debt accumulation: an empirical examination of US household behaviour (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tri:wpaper:1204

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