A Theory of Aggregate Consumption

Trinity College of Economics Working Paper 13-01

30 Pages Posted: 3 Feb 2013  

Yun Kim

Trinity College (Hartford CT)

Mark Setterfield

New School for Social Research

Yuan Mei

Trinity College (Hartford CT) - Department of Economics

Date Written: January 1, 2013

Abstract

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

Kim, Yun and Setterfield , Mark and Mei, Yuan, A Theory of Aggregate Consumption (January 1, 2013). Trinity College of Economics Working Paper 13-01. Available at SSRN: https://ssrn.com/abstract=2210994 or http://dx.doi.org/10.2139/ssrn.2210994

Yun Kim

Trinity College (Hartford CT) ( email )

300 Summit Street
Hartford, CT 06106
United States

Mark Setterfield (Contact Author)

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

Yuan Mei

Trinity College (Hartford CT) - Department of Economics ( email )

United States

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