Rethinking Consumption Theory: Evidence from Chinese Data

Abstract

The relationship between consumption and income is an annoying problem which have not an accepted conclusion in advanced macroeconomic textbooks hereunto. One contribution to this theme in this paper is to establish a new analytical framework by integrating the neoclassic dynamic macroeconomic theory and the co-integration theory in time series analysis successfully. By using Chinese data since refom and open, we found some linear combination of cosumption and income form a longrun equilibrium, and there is significant positivere lationship between the fist differences of cosumption and income series in the shortrun term while the error cection correct mechanism works in the longtrun term. Another contribution is that we definitely point out following theory and hypothesises are special cases of this framework, such as traditional Keynesim consumption theory, the random walk hypothesis(which is the modern version of the life-cycle hypothesis or the permanent income hypothesis), and the famous Campbell-Mankiw's hypothesis.