Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence

52 Pages Posted: 25 Oct 2000 Last revised: 30 Dec 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 1989

Abstract

This paper proposes that the time-series data on consumption, income, and interest rates are best viewed as generated not by a single representative consumer but by two groups of consumers. Half the consumers are forward-looking and consume their permanent income, but are extremely reluctant to substitute consumption temporarily. Half the consumers follow the "rule of thumb" of consuming their current income. The paper documents three empirical regularities that, it argues, are best explained by this medal. First, expected changes in income are associated with expected changes in consumption. Second, expected real interest rates are not associated with expected changes in consumption. Third, periods in which consumption is high relative to income are typically followed by high growth in income. The paper concludes by briefly discussing the implications of these findings for economic policy and economic research.

Suggested Citation

Campbell, John Y. and Mankiw, N. Gregory, Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence (April 1989). NBER Working Paper No. w2924, Available at SSRN: https://ssrn.com/abstract=246869

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N. Gregory Mankiw

Harvard University - Department of Economics ( email )

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