Aggregate Consumption and the Distribution of Income in the United Kingdom: An Econometric Analysis

Abstract

Blinder (I975) explained this omission by arguing that 'with the ascendancy of the Friedman (1957) and Modigliani and Brumberg (I954) models of consumer behaviour' the view that income distribution affected aggregate consumption 'fell into disrepute in academic circles. It was supplanted by the view that marginal, and perhaps even average, propensities to consume are constant over the income distribution' (pp. 447-8). The life-cycle model, as is well known, derives the aggregate consumption function from the hypothesis that the consumer chooses the time path of consumption which maximises lifetime utility, subject to the constraint that the present discounted value of all consumption, plus the present discounted value of the bequest (if any), is equal to lifetime disposable resources. A consequence of such a hypothesis is that consumption at each instant is proportional to lifetime disposable resources, with the constant of proportionality dependent only on age, length of life, the rate of interest and tastes. In their empirical work Friedman and Modigliani may also have had to ignore income distribution due to lack of data. However Blinder (1975) went on to show that even under the 'life cycle' hypothesis, provided that the marginal utility of bequests, say f,, was different