The Relative Income Theory of Consumption: A Synthetic Keynes-Duesenberry-Friedman Model

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

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.

Keywords: Consumption; permanent income; relative income; Keynes; Duesenberry; Friedman (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-mac and nep-pke
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Citations: View citations in EconPapers (12)

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