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Consumption - 2

Consumption - 2. ECN 201 -Economic Data Analysis Lawlor. Review. Linear form of consumption function: C = a + b*Y where a is “autonomous spending” b = MPC Fits Keynes’s “Fundamental Psychological Law” Fits the U. S. post-war data: Gretl LR MPC = .96 Fits the U. S. Great Depression

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Consumption - 2

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  1. Consumption - 2 ECN 201 -Economic Data Analysis Lawlor

  2. Review • Linear form of consumption function: • C = a + b*Y • where a is “autonomous spending” • b = MPC • Fits Keynes’s “Fundamental Psychological Law” • Fits the U. S. post-war data: Gretl • LR MPC = .96 • Fits the U. S. Great Depression • MPC = .76

  3. Further Explore The MPC APC = the Average Propensity to Consume • = C/Y = (a + by)/Y = a/y + b • Define MPC and APC graphically • Show how to simulate it on Excell

  4. Explore meaning of “a” • Statistically is the measure of our ignorance • Algebraically, Graphically a’s arithmetic sign related to the rate of change of APC while income changes • If it is negative, a/Y<MPC, APC <MPC, and falls as income rises • If it is positive, a/Y>MPC, APC>MPC, and rises as income rises • If it is zero, a/Y = MPC, APC = MPC, and is constant as income rises

  5. Can Simulate this with Excel • Decide on the parameters “a” and “b” • Fill in different values of Y to get different values of C • Show on Excel

  6. Does the l.r. Cons. Fn. Make Sense • Remember in Keynes’s discussion of “units” he said aggregate variables were only comparable over the s. r. • Meant aggregate Y, C, P • We may want to restrict our comparisons to “decade” long units at the most • We ask you to do some of this type of modeling in Gretl in your assignment - show

  7. Or, both in the s.r. and the l.r. may want to add more variables • Keynes mentioned “windfall changes in capital values” • Perhaps the way Americans, and American society, has altered the way that average people save, and so changed the average household balance sheet, has effected the MPS • Discuss this, and the difference between “defined benefit” plans and “defined contribution plans”

  8. What sorts of assets are important to Households • Mutual Fund saving suggest that financial market instruments might be important • Could proxy this effect statistically with stocks • See the St. Louis Fed database • Maybe most important in the period of rapid increase in stock prices, 1990s • The current period suggest some people are saving through speculation in housing • If interested, see Duca article

  9. Note relation to cons. Fn. • We are saying there is more than one variable responsible for a con. fn, and so a savings fn. • C = f(Y, stock values, house values, culture, financial market innovation (sub-prime mortgages)) • Statistically, this increase in rhs variables means we are entering into the realm of “multiple variable regression”

  10. One linear form of this • C = a + b1Y + b2S&P500 • Note we are asking you to explore this possibility in the LR in your project • Look at TRSP in Gretl, graph it as a time series, explain its dynamics • Explore time series plot alone and with C, with APC • Show how to construct APC • Class example might be to consider a recent s.r. period: • Note: first consider data availability, also what we know of institutional and economic history

  11. TRSP Limits us to 2003:12, so lets run a regression for the period 1983:12 – 1993:12 • Captures the period of run up in stock values • Show how in Gretl “range,” “model,” and add • Model the cons. fn. for this period with and without TRSP

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