The Macroeconomic implications of consumption.pdf

The Macroeconomic implications of consumption

State-of-art and prospects for the heterodox future research

18th FMM Conference Inequality and the Future of Capitalism Berlin, 30 October 01 November 2014

Ldia Brochier Universidade Estadual de Campinas (UNICAMP)

Antonio Carlos Macedo e SilvaUniversidade Estadual de Campinas (UNICAMP)

Outline

1) Introduction

2) Post-Keynesian literature: household debt and its effects on growth

3) Autonomous expenditures and the long-run growth: the Sraffian supermultipler model

4) Concluding remarks

18th FMM Conference Inequality and the Future of Capitalism Berlin, 30 October 01 November 2014

1 Introduction

Consumption depicted as well-behaved and uninteresting

The American experience showed consumption is important

A significant number of papers concerned about household indebtedness emerged

18th FMM Conference Inequality and the Future of Capitalism

1 Introduction

Berlin, 30 October 01 November 2014

1 Introduction

First moment, the paper reviews the recent, mostly theoretical, Post-Keynesian literature on personal consumption and household indebtedness

Keynesian literature: demand-led economies where investment assumes the leading role

In growth models or long-run analyses, different assumptions could be explored


1 Introduction


1 Introduction

The ultimate driver of growth may not be private investment, but residential investment, personal consumption, government expenditures or net exports

Second moment, we turn to the so-called Sraffian supermultiplier model

Reintroduced to the Post-Keynesian audience by Lavoie


1 Introduction


Three convergence points in the literature

First one, household indebtedness and credit-based consumption have positive effects in the short-run, but in the long-run deliver ambiguous results

Relative consumption and income concerns brought back to the center of attention (Veblens and Duesenberrys ideas)

Kaleckian dichotomy between two classes of agents: workers and capitalists


2 Post-Keynesian literature: household debt and its effect on growth


Palley (1994): seminal work on the subject

Before the financial crisis, two important papers dealing with household consumption and debt: Bhaduri et al. (2006) and Dutt (2006)

After the financial crisis, focus on income inequality effects on household debt and economic growth




Inter and intra-class emulation: Barba and Pivetti (2009) consider both, Kapeller and Schutz (2014) focus on the last one

Consumption emulation as an additional term in the consumption function based on borrowing mechanisms





1. Main characteristics of Post-Keynesian literature reviewed

Paper Theoretical approach Period of analysis Growth regime Consumption

Palley (1994) Minsky-Kaldor Short-run Demand-led: investment Creditors and debtors

Dutt (2006) Minsky-Steindl-Kalecki

Short-run and Long-run (rate of

capacity utilization is endogenously

determined)

Demand-led: investment Workers and capitalists

Bhaduri et al. (2006) Kalecki-KeynesShort-run and medium-run (Analysis

in terms of growth rates)Demand-led: investment Homogenous consumption

Godley and Lavoie (2007,

ch.11)

Post-Keynesian (Keynes-

Kalecki)Short- run and long-run Demand-led: government expenditures Homogenous consumption

Zezza (2008)Post-Keynesian (Godley and

Lavoie)Short-run and long-run (steady state) Demand-led: investment Workers and capitalists

Barba and Pivetti (2009) Duesenberry-Veblen Long-run -

Consumption function close to

Duesenberry's (relative income

concerns)

Palley (2009) Cambridge-Kalecki Short-run and long-run (steady state) Demand-led: investment Creditors and debtors

Hein (2011) KaleckiShort-run and long-run (similar to

Dutts (2006))Demand-led: investment Workers and rentiers

Onaran et al. (2011) Kalecki-Steindl Short-run and long-run Demand-led: investment Homogenous consumption

Kim (2012) Kalecki-DuesenberryShort-run and medium-run (steady

state)Demand-led: investment

Workers and capitalists (emulation

effect)

Ryoo and Kim (2013)Duesenberry-Veblen-Kaldor-

Minsky

Short-run and long-run (average long-

run utilization rates converge to

natural rates)

Demand-led: investmentWorkers and capitalists (emulation

effect)

Kim et al. (2013)Duesenberry-Cynamon and

FazzariShort-run No growth (firms do not invest)

Workers and capitalists (emulation

effect)

Kapeller and Schutz

(2014)Veblen-Minsky Short-run -

Two groups of workers (emulation

effect) and capitalists

Source: elaborated by the authors.


Essential contributions

Larger role attributed to the autonomous component of consumption

Household debt accumulation and debt service payment dynamics taken into account

Some limitations

Household debt and consumption analyzed in an investment demand-led growth model

Simplifying hypothesis which if lifted could lead to different results


3 Long-run growth: the Sraffiansupermultiplier model




Autonomous expenditures are usually assumed to grow in line with capital stock or the level of income

But US recent experience suggests consumption can grow autonomously from current income

What if the capital stock grows in line with autonomous expenditures? What if autonomous consumption takes on the leading role of economic growth in the long-run?


3 Long-run growth: the Sraffian supermultiplier model


Demand may come from other final items and still can deliver stable models which converge to a steady state, provided that a different simplifying assumption is adopted: that investment is strictly induced

The Sraffian supermultiplier model: the non-capacity generating expenditures become the dynamic driver of growth

Supermultiplier model explores the idea that there is a fundamental distinction between capacity-creating private investment and other autonomous expenditure items




Other items are not restrained by the constraint of profitability benchmarks

So far, in the supermultiplier models, just one of the autonomous expenditure items is singled out as the growth engine

In Serranos supermultiplier model, long-term growth depends on the rate of growth of an autonomous component of demand exogenously given in this case, autonomous consumption




Two main conditions need to be fullfiled for the system to be demand-led in Serrano:

+ < 1

> 0

The second condition implies that the average propensity to save will be an endogenous variable, even if the marginal propensity to save and the profit share are constant




The average propensity to save depends on the marginal propensity to save and on a proportion between autonomous expenditures and induced investment: =

Changes in autonomous expenditures growth rate have permanent effects on growth rates of output and capacity

While changes in the determinants of the propensities to consume or save have only permanent level effects on output and capacity




Serrano and Freitas (2014): two long period scenarios Steady state with incomplete adjustment: medium run Steady state with complete adjustment: long run (fully adjusted

positions)

Main criticism to Sraffians is related to the assumption of fully adjusted positions, however, in the case of the Serrano and Freitas (2014) it is not required for keeping most of the models conclusions




Regarding the financial factors, Serrano and Freitas (2014) recognize that:

() research efforts should focus on the determinants anddynamics (particularly financial) of the trend of growth ofdifferent unproductive autonomous components of demand(Serrano and Freitas, 2014: 21).




There could be a complementarity between the Supermultiplierapproach and some Post-Keynesian (and neo-Kaleckian) approaches

Keynesian demand-led models do not necessarily need to be private investment-led ones

The possibility of a steady state has a cost, it implies the model can explore only one growth engine at a time


4 Concluding remarks


This is not necessarily bad: it would be an enriching endeavor to build each of these models, taking into account the peculiarities of each expenditure variable

The Stock-flow consistent approach seems to be an appropriate framework to develop this research


4 Concluding remarks


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