A Theory of Aggregate Consumption

by Sabrina I. Pacifici on February 3, 2013

Kim, Yun, Setterfield , Mark and Mei, Yuan, A Theory of Aggregate Consumption (January 1, 2013). Trinity College of Economics Working Paper 13-01. Available at SSRN

  • “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.”
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