Thursday, December 17, 2009

A graph that explains and needs explaining 

Finally, it is of interest to note that a discussion of the prospects for US economic growth, and consumption behavior, cannot be realistically appraised using the standard Keynesian consumption function. Rather, some discussion of how consumption depends on both current disposable income and net household wealth is essential.
Menzie Chinn this morning. I think I have done this in past lectures in my own graduate macro course, but perhaps not so much in intermediate undergraduate macro. Chinn is absolutely correct on how we will need to adjust macro textbooks regarding consumption, but it's the first opportunity to see a noticeable wealth effect. This ties well to a look at household balance sheets by James Kwak which I've used often in presentations. I'll be adding Chinn's graph to that mix, thank you sir!

(I can hear some of you asking "but did you ever use Keynesian consumption functions?" "Use" is too strong a word. But show and explain them, with critical appraisal of strengths and weaknesses? Certainly. They are still the language of many large-scale macroeconometric models. Hard to find a forecasting model for U.S. consumption that doesn't have some variant of disposable personal income in it.)