Figure 1 shows how he compared the Keynesian consumption function
with the Austrian time structure of production model, known as the Hayekian triangle.
These developments have brought home two ideas which Keynesian consumption function
implies; income distribution has serious consequences for economic growth and income distribution gets worse in a decentralised economy as it grows over time.
In addition, the cumulative extension of credit to all, while obviously an individual 'good', became more and more a public 'bad' at the systemic level as changes in borrowing and lending rates to consumers, combined with wealth effects, served to make the Keynesian consumption function
as unstable and volatile as investment expenditure traditionally was known to be: hence, the enlarged amplitudes of trade cycles and deeper and more prolonged slumps.
The standard view of the government purchases multiplier--as expressed, for example, in the quote from Gall and coauthors in the previous section-is that a Keynesian consumption function
delivers fairly high multipliers.
An important implication of the Keynesian consumption function
is that saving rate increases with income.
In the Spring, 1988 issue of this journal, Edward Shapiro observed that estimates of the short run textbook Keynesian consumption function
utilizing post-1973 data are radically different from those which were obtained using earlier sample periods.
From a policy perspective, the existence of a large precautionary saving motive implies that, as far as certain policies are concerned, the response of consumers to changes in income may be close to that suggested by the Keynesian consumption function
. This is in stark contrast to the certainty-equivalence PI model which predicts that cuts in current taxes, which must later increase beyond the normal level, in order to service the accumulated debt, will be expected to have no influence on consumption.
Secondly, the life cycle model may not fare will against a competing model such as a simple Keynesian consumption function
. An extended version of the life cycle model is tested below against the Keynesian consumption function
An example of a fixed-coefficient equation is the simplified Keynesian consumption function
For a given wage, a Keynesian consumption function
implies a positive relation between hours, which determine income, and consumption (Hall ).
Criticisms fall into four categories: (1) failure of the model to reckon with supply inelasticities; (2) drift over time of estimated parameter values due to evolving local economies; (3) focus on exports to the exclusion of other autonomous sources of demand; (4) weaknesses that any Keynesian consumption function
Table 2 contains the estimated results for equation 13, which is the simple Keynesian consumption function
. As expected consumption per capita is positively correlated with per capita income, and the result is significant at less than 1 percent.