Understanding Consumption

Understanding Consumption

Understanding Consumption

Understanding Consumption

Synopsis

This book provides an overview of the recent research on saving and consumption, a field in which substantial progress has been made over the last decade. Attempts by economists to understand saving and consumption patterns have generated some of the best science in economics. For more than fifty years, there has been serious empirical and theoretical activity, and data, theory, and policy have never been separated as has happened in many branches of economics. Research has drawn microeconomists interested in household behaviour, as well as macroeconomists, for whom the behaviour of aggregate consumption has always occupied a central role in explaining aggregate fluctuations. Econometricians have also made distinguished contributions, and there has been a steady flow of new methodologies by those working on saving and consumption, in time-series econometrics, as well as in the study of micro and panel data. A coherent account of these developments is presented here, emphasizing the interplay between micro and the macro, between studies of cross-section and panels, and those using aggregate time series data.

Excerpt

This book is an expanded version of the Clarendon Lectures given in Oxford in May 1991; earlier versions were presented to the Network for Quantitative Economics in Rotterdam in May 1990, and to my Empirical Modelling course in Princeton over a number of years. In Oxford, there were three one-hour lectures, and although the book is faithful to the structure of my verbal presentation, many of the details have been filled in, and there is additional material to which only passing reference was made in the lectures. Many of those in the Oxford audience were graduate students, and the lectures were presented at a level designed to be comprehensible to them as well as to advanced (British) undergraduates. The emphasis is on the development of intuition rather than on the mathematics underlying the results, and on stylized facts rather than on formal econometric methodology. The book has more mathematics and more econometrics than the lectures, but I have attempted to retain the original level of accessibility. I hope that my professional colleagues will be as tolerant of the informality as were the Oxford faculty who attended the lectures.

Attempts by economists to understand the saving and consumption patterns of households have generated some of the best science in economics. For more than fifty years, there has been serious empirical and theoretical activity, and the two strands have never been long separated as has happened in so many other branches of economics. Research has drawn microeconomists interested in household behavior, as well as macroeconomists, for whom the behavior of aggregate consumption has always occupied a central role in explaining aggregate fluctuations. Econometricians have also made distinguished contributions, and there has been a steady flow of new methodology from those working on saving and consumption. Nor have policy concerns ever been far from the surface. The relationships between saving and business cycles, saving and growth, saving and competitiveness, and saving and welfare have been hotly and continually debated. It is hard to think of economic issues that are more important than the accumulation of capital, and the means by which citizens, either individually or collectively, make provision for their futures. All of this has produced an unusually rich brew, with aromas that attract almost all types of economist. Especially over the last fifteen years, and in particular since Hall's (1978) paper on the stochastic implications of forward-looking behavior, there has been a great flurry of activity. This activity paralleled and took off from the earlier explosion of the 1950s, which saw the development of the then 'new' theories of the consumption function, particularly the life-cycle . . .

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