ConsTheory -...

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Theories of Consumption (aggregate C =  c for all households) Irving Fisher : c 1  = f(y 1 +y 2 /(1+r), r), but with offsetting income and substitution  effects  c  f(y 1 +y 2 /(1+r)) Franco Modigliani , Life Cycle Hypothesis:   (Simplifies Fisher by ignoring discounting and assuming c* 1 =c* 2 “consumption smoothing.”  Emphasized the importance of demographics for  explaining aggregate savings.  See “Saving Grace”) At birth:   T y c R j j / 1 1 = =   At any age, a  ) /( a T w y c R a j j a - + = = Aggregate Consumption: C =  α DI +  β W;  where  α β = Milton Friedman , Permanent Income Hypothesis: (Future y’s should be based on a forecast of income, which does not  necessarily equal current income.) Aggregate Consumption: C =  α W +  β DI P  ;  where DI P  is “permanent income” All three of these theories are based on the same 
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This note was uploaded on 03/02/2010 for the course ECON 57 taught by Professor Woglom during the Spring '08 term at UMass (Amherst).

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ConsTheory -...

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