A Theory of Aggregate Consumption
Trinity College of Economics Working Paper 13-01
30 Pages Posted: 3 Feb 2013
Date Written: January 1, 2013
We develop a Keynesian model of aggregate consumption. Our theory emphasizes the importance of the relative income hypothesis and debt-finance for understanding household consumption behavior. It is shown that particular importance attaches to how net debtor households service their debts, and that the treatment of debt servicing commitments as a substitute for savings by these households creates the potential for “sudden stops” in consumption spending (and hence aggregate demand). The implications for aggregate consumption of changes in the distribution of income and changes in the composition of employment are also explored.
Keywords: consumption, household borrowing, household debt, relative income hypothesis
JEL Classification: E12, E21
Suggested Citation: Suggested Citation