BRINNER1902mit08.pptConsumer Spending and HousingLecture 9BRINNER2902mit08.pptCentral Issues◆ The Role of Income– Short- vs. Long-run MPC and APC◆ The Role of Wealth◆ Motivations to Save– Roles of Expectations and Reactions toActual or Anticipated Policies– Responses to Interest Rates, TaxesBRINNER3902mit08.pptShort- vs. Long-run MPC and APC◆ Average Propensity to Consume:– Simply: Consumer Spending/ Disposable Income◆ Marginal Propensity to Consume:– for any specific time interval = Change inSpending / Changein Income◆ In the “Long-Run”, both APC and MPCappear to be close to 95% for the US in thepostwar period◆ The LR Elasticity (ratio of MPC to APC) isthus 1.0BRINNER4902mit08.pptShort- vs. Long-run MPC andAPC, and the Role of Wealth◆ Life Cycle Hypothesis:– C= f ( LaborIncome, Wealth )◆ Age distribution of population important◆ So are factors determining need to save:– ease of financing for large purchases– “free” retirement income fromemployer or government– worry about health and life expectancy– desires for bequestsBRINNER5902mit08.pptShort- vs. Long-run MPC andAPC, and the Role of Wealth◆ Permanent Income Hypothesis:– C= f (Current and Expected Income)– Both labor and capital income areconsidered◆ Age distribution of population stillimportant because the annuity valuediffers◆ So are other factors determining need tosaveBRINNER6902mit08.pptShort- vs. Long-run MPC andAPC, and the Role of Wealth◆ Life Cycle and Permanent IncomeHypotheses both:– recognize current choices reflectthinking about lifetime income andspending– predict short-run MPC < APC– expect dissaving in retirement yearsBRINNER7902mit08.pptThe Basic Math◆ C=a+b1*YD +b2*YD\1+d*W◆ short-run MPC = b1◆ short-runAPC=C/YD◆ if “long-run” implies YD = YD\1 and W=k*YD(that is, wealth is proportionate to income)– C= a + (b1+b2+d*k) * YD– MPC= (b1+b2+d*k)– APC=C/YD= MPC + a / YD– so if “autonomous consumption (a)” is small,the long-run MPC=APCBRINNER8902mit08.pptThe Basic Math◆ Elasticity= % change C / % change YD– = [(C-C\1)/C\1] / [(YD-YD\1)/YD\1]– =[(C-C\1)/(YD-YD\1)] / [C\1 / YD\1]– =MPC/APC◆ in long run, elas.=MPC / (MPC + a/YD)– = approximately 1Average Propensities to Consume80%82%84%86%88%90%92%94%96%98%1967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000% of Disposable Income0%10%20%30%40%50%60%APC-Total APC-Durables APC-Nondurables APC-ServicesNote: 1) Different trends and 2) Differential cyclicaltitesTotal --- graphed on left scale;Components--graphed on right scaleObvious Wealth Efffects:APC charted versus Wealth/Income Ratio80%82%84%86%88%90%92%94%96%98%19671969197119731975197719791981198319851987198919911993199519971999APC3.54.04.55.05.56.06.57.07.5Wealth/Income MultipleAPC-Total Assets / IncomeThe Marginal Propensity to Consume (1968-2000)$(100)$-$100$200$300$400$(100) $- $100 $200 $300 $400Annual Change in YDAnnual Change in C2000198419661991199119911991199119801974Equal Changes if on thMost Cases: change in C < change inOther Cases: change in C > change in YDMPCs : Annual Changes in C and YD$(50)$-$50$100$150$200$250$300$35019681970197219741976197819801982198419861988199019921994199619982000Real disposableTotal CServicesNondurablesDurablesThe MPC fordurables = MPCnondurables,even though APCdur < 1/2 APCnondurDependent Variable: C96C-C96C(-1) Change in Real Total CMethod: Least SquaresDate: 03/12/01 Time: 17:30Sample(adjusted): 1970 2000Including Wealth Effects Excluding Wealth EffectsVariable Coefficient Std. Error t-StatisticCoefficient Std. Error t-StatisticC (17.46) 26.84 (0.65) 19.67 20.99 0.94Real Income Change (Wage and Capital) 0.48 0.11 4.24 0.63 0.13 4.76Real Income Change, Prior Year 0.11 0.11 1.00 0.33 0.13 2.64Bond rate change (6.27) 7.41 (0.84) (1.33) 8.26 (0.16)Bond rate change, prior year (6.24) 6.83 (0.91) (6.87) 8.64 (0.80)Real Wealth change 0.030 0.01 2.35Real Wealth change, prior year 0.018 0.01 1.30R-squared 0.80 0.66Adjusted R-squared 0.73 0.60S.E. of regression 41.46 50.04Mean dependent var 130.01 130.01Note estimated MPC’s:•.5to.6 currentyear,upto.96bothyears•lower coefficients with wealth accounted for independentlyNote reaction to interest ratesDependent Variable: CD96C-CD96C(-1) Change in Real Durable CMethod: Least SquaresDate: 03/12/01 Time: 17:30Sample(adjusted): 1970 2000Including Wealth Effects Excluding Wealth EffectsVariable Coefficient Std. Errort-StatisticCoefficient Std. Error t-StatisticC (26.25) 11.02 (2.38) (15.31) 7.42 (2.06)Real Income Change (Wage and Capital) 0.17 0.04 4.51 0.22 0.05 4.77Real Income Change, Prior Year 0.04 0.04 1.18 0.11 0.04 2.43Bond rate change (3.33) 2.45 (1.36) (1.19) 2.92 (0.41)Bond rate change, prior year (1.95) 2.27 (0.86) (1.08) 3.05 (0.35)Real Wealth change 0.009 0.00 1.97Real Wealth change, prior year 0.006 0.00 1.33R-squared 0.80 0.64Adjusted R-squared 0.74 0.58S.E. of regression 14.27 17.69Mean dependent var 22.72 22.72Note estimated MPC’s for durables:•.2 current year, up to .3 both years•lower coefficients with wealth accounted for independentlyNote reaction to interest ratesDependent Variable: LOG(CONS96C)--Real CMethod: Least SquaresDate: 03/02/01 Time: 12:30Sample(adjusted): 1961 2000Included observations: 40 after adjustingendpointsVariable Coefficient Std. Error t-StatisticC (1.25) 0.17 (7.36)LOG(WSD/PCWC)--Real Wage Income 0.51 0.23 2.25LOG(WSD(-1)/PCWC(-1))--Real Wage Income,Prior Year 0.55 0.27 2.04LOG(HHNETW96C(-1)+HHNETW96C(-2))---Real Household Net Worth, Prior Average 0.10 0.11 0.93@PCH(CPI) (0.69) 0.25 (2.77)R-squared 0.996Adjusted R-squared 0.995S.E. of regression 0.028Mean dependent var 8.080S.D. dependent var 0.392Log-Log regression: long-run labor income elasticity approx. =1BRINNER16902mit08.pptExtensions and Applications◆ Expectation formation:– Barro theory intriguing but wrong◆ Note empirical tests show consumersdon’t judge the nature of the tax change◆ Consider how lagged responses create amultiplier that changes over time◆ Consider how to “multiplier” depends onmonetary policies, etc.Dependent Variable: CD96C-CD96C(-1) Change in Real Durable CMethod: Least SquaresDate: 03/12/01 Time: 17:30Sample(adjusted): 1970 2000Including Wealth EffectsVariable Coefficient Std. Error t-StatisticC (26.25) 11.02 (2.38)Real Disp.Inc. Change (Wage and Capital) 0.17 0.04 4.51Real Disp. Income Change, Prior Year 0.04
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