Optimal Aggregate Consumption for Economic Growth

20 Pages Posted: 31 Dec 2014

See all articles by Wilson N. Sy

Wilson N. Sy

Investment Analytics Research

Date Written: January 1, 2015

Abstract

The Keynesian intuition that increasing consumption can stimulate investment is verified empirically using US macroeconomic data. The investment multiplier is hypothesized to increase monotonically with the propensity to consume. However, the functional relationship is not that of the Keynesian multiplier, as assumed axiomatically but incorrectly, in standard Keynesian economics. By modelling the investment multiplier as a power function of the consumption propensity, with empirically estimated parameters, we show that there exists an optimal level of aggregate consumption which maximizes national economic growth by balancing aggregate demand and supply in a dynamic equilibrium. For the US economy, the optimal aggregate consumption is estimated to be about 88 percent of the gross domestic product (GDP) over the data period. With the US aggregate consumption propensity already well past the optimal level in recent decades, US government policies to stimulate more consumption to increase economic growth have been counter-productive for several decades.

Keywords: Keynes, macroeconomics, investment multiplier, consumption

JEL Classification: C22, C51, E12, E21, E61

Suggested Citation

Sy, Wilson N., Optimal Aggregate Consumption for Economic Growth (January 1, 2015). Available at SSRN: https://ssrn.com/abstract=2544193 or http://dx.doi.org/10.2139/ssrn.2544193

Wilson N. Sy (Contact Author)

Investment Analytics Research ( email )

12 Gilchrist Place
Balmain East, NSW 2041
Australia
0424669802 (Phone)

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