Intertemporal Macroeconomics
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Discuss with reference to empirical evidence why changes in consumption should be unpredictable.
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Solution Summary
The expert discusses why changes in consumption should be unpredictable with reference to empirical evidence.
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This is a great topic. Remember, I cannot answer the question directly. What I shall do is lay out the basic theoretical elements of Hall's (1976) thesis on consumption unpredictability. I'll also include a few scholarly sources for you to read and cite. Keep in mind too that this literature is not easy. But I will try to make it as simple as possible.
The basics--We assume that consumers are totally rational. For the model's sake, that works. It does NOT work in reality.
In a totally rational consumer universe, there will be predictable patterns of consumption so long as incomes themselves remain basically stable over time.
YET - there is no reason to believe that incomes will remain stable, especially over a lifetime.
Why is this important?
This is significant for several reasons. The simple one is that people have all kinds of surprise in their lives --- windfalls, disasters, health problems, etc. that cannot really be predicted. Of course, this changes their consumption habits.
This implies that consumption in this case cannot be predicted, since consumption is based on far more things than just income and "consumer rationality".
But this is just the beginning.
There is another reason too - what of the government or economic fluctuations? Governments can raise taxes; they can increase mandates; they can pile on new regulations; they can make bankruptcy harder to declare. . . .But why stop there? What about speculation on the dollar? Is it possible that global markets can ...
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