宏观经济学英文课件：lecture11 Consumption

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1、Lecture 11ConsumptionKeyness Conjectures1.0 MPC 0 save more MPC 1 save a larger fraction of their income APC as Y Very strong correlation between income and consumption income seemed to be the main determinant of consumptionslide 4Problems for the Keynesian Consumption FunctionBased on the Keynesian

2、 consumption function,economists predicted that C would grow more slowly than Y over time.This prediction did not come true:As incomes grew,the APC did not fall,and C grew just as fast.Simon Kuznets showed that C/Y was very stable in long time series data.slide 5The Consumption Puzzleslide 6CYConsum

3、ption function from long time series data(constant APC)Consumption function from cross-sectional household data(falling APC)Irving Fisher and Intertemporal Choice The basis for much subsequent work on consumption.Assumes consumer is forward-looking and chooses consumption for the present and future

4、to maximize lifetime satisfaction.Consumers choices are subject to an intertemporal budget constraint,a measure of the total resources available for present and future consumptionslide 7Intertemporal Choice Most of macroeconomics is about changes over time So far,have jus considered the decision of

5、work versus leisure Need to add choice of today versus tomorrow8Examples Some intertemporal choices:Borrowing and saving by consumers Investment by firms Human capital investment by students Family decisions9Important Factors for Intertemporal Choice:Preferences over time(patience)Expected return on

6、 investment Expected future economic conditions10The basic two-period model Period 1:the present Period 2:the future NotationY1 is income in period 1Y2 is income in period 2C1 is consumption in period 1C2 is consumption in period 2S=Y1-C1 is saving in period 1(S 0 if the consumer borrows in period 1

7、)slide 11The Setup Utility function:Budget constraints:Want to know how and depend on (intertemporal preferences)(economic conditions)(return on investment)12(,)()()U c cu cu c(1)cyscyr s-,c cs,y yrDeriving the intertemporal budget constraint Period 2 budget constraint:slide 1322(1)CYr S211(1)()YrYC

8、-Rearrange to put C terms on one side and Y terms on the other:1221(1)(1)r CCYr YFinally,divide through by(1+r):The intertemporal budget constraintslide 14221111CYCYrrpresent value of lifetime consumptionpresent value of lifetime incomeThe intertemporal budget constraintThe budget constraint shows a

9、ll combinations of C1 and C2 that just exhaust the consumers resources.slide 15C1C212(1)YYr12(1)r YYY1Y2BorrowingSavingConsump=income in both periods221111CYCYrrThe intertemporal budget constraintThe slope of the budget line equals-(1+r)slide 16C1C2Y1Y2221111CYCYrr1(1+r)Consumer preferencesAn shows

10、all combinations of C1 and C2 that make the consumer equally happy.slide 17C1C2IC1IC2Higher indifference curves represent higher levels of happiness.Consumer preferences(MRS):the amount of C2 consumer would be willing to substitute for one unit of C1.slide 18C1C2IC11MRSOptimizationslide 19C1C2OAt th

11、e optimal point,MRS=1+rHow C responds to changes in Y An increase in Y1 or Y2 shifts the budget line outward.slide 20C1C2Results:Provided they are both normal goods,C1 and C2 both increase,regardless of whether the income increase occurs in period 1 or period 2.Keynes vs.Fisher Keynes:current consum

12、ption depends only on current income Fisher:current consumption depends only on the present value of lifetime income;the timing of income is irrelevant because the consumer can borrow or lend between periods.slide 21How C responds to changes in rAn increase in r pivots the budget line around the poi

13、nt(Y1,Y2).slide 22AC1C2Y1Y2ABAs depicted here,C1 falls and C2 rises.However,it could turn out differentlyHow C responds to changes in r income effectIf consumer is a saver,the rise in r makes him better off,which tends to increase consumption in both periods.substitution effectThe rise in r increase

14、s the opportunity cost of current consumption,which tends to reduce C1 and increase C2.Both effects C2.Whether C1 rises or falls depends on the relative size of the income&substitution effects.slide 23Constraints on borrowing In Fishers theory,the timing of income is irrelevant because the consumer

15、can borrow and lend across periods.Example:If consumer learns that her future income will increase,she can spread the extra consumption over both periods by borrowing in the current period.However,if consumer faces borrowing constraints(aka“liquidity constraints”),then she may not be able to increas

16、e current consumptionand her consumption may behave as in the Keynesian theory even though she is rational&forward-lookingslide 24Constraints on borrowingThe budget line with no borrowing constraintsslide 25C1C2Y1Y2Constraints on borrowingThe borrowing constraint takes the form:C1 Y1slide 26C1C2Y1Y2

17、The budget line with a borrowing constraintConsumer optimization when the borrowing constraint is not bindingThe borrowing constraint is not binding if the consumers optimal C1 is less than Y1.slide 27C1C2Y1Consumer optimization when the borrowing constraint is bindingThe optimal choice is at point

18、D.But since the consumer cannot borrow,the best he can do is point E.slide 28C1C2Y1DEMathematical Solution Substitute constraints into utility function:Setting derivative wrt.s to zero:29max()(1)u y su yr s-0()(1)()()1()u cr u cu cru c -OutcomeMRS=Interest rate Same as before Simple Model:Choice bet

19、ween leisure and labor MRS(l,C)=Relative price(l,C)Intertemporal model:Choice between today and tomorrow MRS =Relative price 30(,)c c(,)c cThe Present-Value Budget Constraint Present value of x dollars tomorrow:Amount needed to be saved today to have x dollars tomorrow Solving period-2 constraint fo

20、r s:31()/(1)PV xxr(1)1111cyr sscyrr-The Present-Value Budget Constraint Plugging the result into the period-1 constraint:PV(total consumption)=PV(total income)3211111111cyscycyrrccyyrr-Outcome MRS=Relative price Pure income effect(increase in either or )will increase both and Implies that s increase

21、s when rises Implies that s falls when rises Only present value of income matters,distribution irrelevant for consumption33yyccyyExample:Log UtilityFOC for and 34max(log()log(1)ysyr s-1(1.1)-0.1r 1101.12.1ysysyys-Computing Consumption Example I:Example II:351,0yy()/2.110/211 10/2111/21(1)1.1 10/2111

22、/21syycyscyr s-0,1.1yy()/2.111/2111/21(1)1.1(1 11/21)11/21syycyscyr s-Conclusions Model predicts strong consumption smoothing:timing of income does not matter Result relies on perfect capital market Even so,evidence for consumption smoothing is strong36Consumption Smoothing in Practice Life-cycle co

23、nsumption:borrow early in life,then save for retirement37Informal Capital Markets Default risk prevents some people from borrowing Society often finds ways around that problem:Transfers from parents and relatives Gift giving and neighborhood help Social insurance38The Life-Cycle Hypothesis due to Fr

24、anco Modigliani(1950s)Fishers model says that consumption depends on lifetime income,and people try to achieve smooth consumption.The LCH says that income varies systematically over the phases of the consumers“life cycle,”and saving allows the consumer to achieve smooth consumption.slide 39The Life-

25、Cycle Hypothesis The basic model:W=initial wealthY=annual income until retirement(assumed constant)R=number of years until retirementT=lifetime in years Assumptions:zero real interest rate(for simplicity)consumption-smoothing is optimalslide 40The Life-Cycle Hypothesis Lifetime resources=W+RY To ach

26、ieve smooth consumption,consumer divides her resources equally over time:C=(W+RY)/T,orC =a aW+Y wherea a=(1/T)is the marginal propensity to consume out of wealth =(R/T)is the marginal propensity to consume out of incomeslide 41Implications of the Life-Cycle HypothesisThe Life-Cycle Hypothesis can so

27、lve the consumption puzzle:The APC implied by the life-cycle consumption function isC/Y=a a(W/Y)+Across households,wealth does not vary as much as income,so high income households should have a lower APC than low income households.Over time,aggregate wealth and income grow together,causing APC to re

28、main stable.slide 42Implications of the Life-Cycle HypothesisThe LCH implies that saving varies systematically over a persons lifetime.slide 43SavingDissavingRetirement beginsEnd of lifeConsumptionIncome$WealthThe Permanent Income Hypothesis due to Milton Friedman(1957)The PIH views current income Y

29、 as the sum of two components:permanent income Y P(average income,which people expect to persist into the future)transitory income Y T(temporary deviations from average income)slide 44The Permanent Income Hypothesis Consumers use saving&borrowing to smooth consumption in response to transitory chang

30、es in income.The PIH consumption function:C =a aY P where a a is the fraction of permanent income that people consume per year.slide 45The Permanent Income HypothesisThe PIH can solve the consumption puzzle:The PIH impliesAPC=C/Y =a aY P/Y To the extent that high income households have higher transi

31、tory income than low income households,the APC will be lower in high income households.Over the long run,income variation is due mainly if not solely to variation in permanent income,which implies a stable APC.slide 46PIH vs.LCH In both,people try to achieve smooth consumption in the face of changin

32、g current income.In the LCH,current income changes systematically as people move through their life cycle.In the PIH,current income is subject to random,transitory fluctuations.Both hypotheses can explain the consumption puzzle.slide 47The Random-Walk Hypothesis due to Robert Hall(1978)based on Fish

33、ers model&PIH,in which forward-looking consumers base consumption on expected future income Hall adds the assumption of rational expectations,that people use all available information to forecast future variables like income.slide 48The Random-Walk Hypothesis If PIH is correct and consumers have rat

34、ional expectations,then consumption should follow a random walk:changes in consumption should be unpredictable.A change in income or wealth that was anticipated has already been factored into expected permanent income,so it will not change consumption.Only unanticipated changes in income or wealth t

35、hat alter expected permanent income will change consumption.slide 49Implication of the R-W Hypothesisslide 50The Psychology of Instant Gratification Theories from Fisher to Hall assumes that consumers are rational and act to maximize lifetime utility.recent studies by David Laibson and others consid

36、er the psychology of consumers.slide 51The Psychology of Instant Gratification Consumers consider themselves to be imperfect decision-makers.E.g.,in one survey,76%said they were not saving enough for retirement.Laibson:The“pull of instant gratification”explains why people dont save as much as a perf

37、ectly rational lifetime utility maximizer would save.slide 52Two Questions and Time Inconsistency1.Would you prefer(A)a candy today,or (B)two candies tomorrow?2.Would you prefer(A)a candy in 100 days,or (B)two candies in 101 days?In studies,most people answered A to question 1,and B to question 2.A

38、person confronted with question 2 may choose B.100 days later,when he is confronted with question 1,the pull of instant gratification may induce him to change his mind.slide 53Summing up Keynes suggested that consumption depends primarily on current income.Recent work suggests instead that consumpti

39、on depends on current income expected future income wealth interest rates Economists disagree over the relative importance of these factors and of borrowing constraints and psychological factors.slide 54Chapter summary1.Keynesian consumption theoryKeynes conjecturesMPC is between 0 and 1APC falls as

40、 income rises current income is the main determinant of current consumptionEmpirical studiesin household data&short time series:confirmation of Keynes conjectures in long time series data:APC does not fall as income risesslide 55Chapter summary2.Fishers theory of intertemporal choiceConsumer chooses

41、 current&future consumption to maximize lifetime satisfaction subject to an intertemporal budget constraint.Current consumption depends on lifetime income,not current income,provided consumer can borrow&save.3.Modiglianis Life-Cycle HypothesisIncome varies systematically over a lifetime.Consumers us

42、e saving&borrowing to smooth consumption.Consumption depends on income&wealth.slide 56Chapter summary4.Friedmans Permanent-Income HypothesisConsumption depends mainly on permanent income.Consumers use saving&borrowing to smooth consumption in the face of transitory fluctuations in income.5.Halls Ran

43、dom-Walk HypothesisCombines PIH with rational expectations.Main result:changes in consumption are unpredictable,occur only in response to unanticipated changes in expected permanent income.slide 57Chapter summary6.Laibson and the pull of instant gratificationUses psychology to understand consumer behavior.The desire for instant gratification causes people to save less than they rationally know they should.slide 58