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
• MPC = .76
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
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
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
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
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”
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
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”
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
• 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