Abstract
This paper studies the dynamic relationship between consumption and investment in the United States between 1947 and 2018. Our findings support the postulates of Keynesian economics—while they are contrary to the theoretic background on which the numerous empirical studies on the saving-investment nexus are based. We find a long-run nexus between consumption and investment, and positive linear Granger-causality running unidirectionally from consumption to investment. Therefore, investment is sustained by consumption. Further, we find that the variables have nonlinear structures and, thus, we apply nonlinear causality tests. We provide evidence of nonlinear causality running unidirectionally from consumption to investment. Nevertheless, after controlling for Government Expenditure, this nonlinear causal relationship disappears, indicating that Government Expenditure drives the nonlinear causal relationship between private consumption and investment. We argue that this finding is consistent with the notion that investment decisions are guided by permanent aggregate demand, because public expenditure allows private consumption to have a sufficiently permanent trajectory to be considered as a guide for investment decisions. Our results do not support the austerity and deflation measures implemented in the last years (especially in the European Union). On the other hand, our findings call for the incentive of final public expenditure, since it favours the long-run link between the private decisions to consume and invest.
Highlights
In the General Theory of Employment, Interest, and Money (1936), John Maynard Keynes emphasized that unemployment arises when investment is insufficient to cover the difference between production at full capacity and aggregate consumption when occupation is in that situation [1] (p. 27)
This result has economic sense and supports the statements of the GT. We interpret this in line with the idea that permanent aggregate demand guides investment decisions [11,12]: public expenditure guarantees households certain goods and services
This paper analyzes the relationship between investment and consumption that the General Theory (1936), by John Maynard Keynes, postulates
Summary
In the General Theory of Employment, Interest, and Money (1936) (hereafter, the GT), John Maynard Keynes emphasized that unemployment arises when investment is insufficient to cover the difference between production at full capacity and aggregate consumption when occupation is in that situation [1] (p. 27). If we look at the simple (without considering public and external sectors) Keynesian aggregate demand identity (Y ≡ C + I = c · Y + v · c · Y), where Y is output, c is the propensity to consume of the community, v is the incremental capital-output ratio (the amount of capital required to increase each unit of total output), and Y is the derivative of Y with respect to time, we have that the sustainable rate of growth (the growth rate that allows the forces of supply and demand to evolve pari passu over time) is (1−c) v·c. We have stated that, according to the GT, unemployment is caused when the actual propensity to consume infers an incentive to invest such that the resulting investment is not enough to cover the difference between production at full capacity and aggregate consumption when occupation is in that situation [1]
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