MacroMicrofoundationandtheBehaviorAnalysis(宏观经济学南开大学,龚刚)

II. Irving Fisher’s Inter-temporal Choice of Consumption

Consumer Preference (continued)
II. Irving Fisher’s Inter-temporal Choice of Consumption

Decision Problem
S = Y1 - C1 (A)
II. Irving Fisher’s Inter-temporal Choice of Consumption

The Inter-temporal Budget Constraint (continued)

This indicates that
(B)
C2 = (1+r)S+Y2 where r is the interest rate. Note that here S can also be regarded as borrowing (dis-saving).

I. Introduction

The objective of this lecture

is to dealing with the first critique—the lacking of micro-foundation by introducing
• some models of behavior analysis on the consumption derived from optimization. • The bounded rationality, which may regarded to be a model of output determination in New Keynesian analysis.
IV. Friedman’s Permanent Income Hypothesis

The Basic Hypothesis

The total income of a consumer is composed of two parts:
• the permanent income Yp and • the transitory income Yt

The Implication
Consumption is not only related to the current income, but also to the interest rate and to the future income the consumer expects. There is no sense of saving over the life of the consumer.
II. Irving Fisher’s Inter-temporal Choice of Consumption

Consumer Preference
The consumer’s preference can be represented by a utility function U = U(C1, C2) The property of such utility function could be represented by a map of indifference curves (see the figure in the next page).

Choose C1 and C2 such that
Max U(C1,C2)
subject to C1+C2/(1+r) = Y1 + Y2/(1+r)
II. Irving Fisher’s Inter-temporal Choice of Consumption

Solution to the Decision Problem
II. Irving Fisher’s Inter-temporal Choice of Consumption

The Inter-temporal Budget Constraint

Suppose a consumer’s life can be divided into 2 periods, and therefore we denote Y Y1: income in period 1; Y2: income in period 2; C1: consumption in period 1; C2: consumption in period 2.

The consumer also pursues a relatively smoothed consumption over its life.
IV. Friedman’s Permanent Income Hypothesis

The Decision Property

Since consumer pursues a smoothed consumption sequence over his life, the consumption in each period could be written as C = aYp + bYt where b is much smaller in comparing with a. Why?

The Model (continued)

The Decision Property: Since consumer pursues a smoothed consumption sequence over his life, the consumption in each period could be written as C = (1/T)W+(R/T)Y or C = aW + bY

MRS between C1 and C2 is equal to 1/(1+r) (see the figure in the next page)
II. Irving Fisher’s Inter-temporal Choice of Consumption

Solution to the Decision Problem (continued)

II. Irving Fisher’s Inter-temporal Choice of Consumption

The Inter-temporal Budget Constraint (continued)
II. Irving Fisher’s Inter-temporal Choice of Consumption
III. Modigliani’s Life Cycle Hypothesis

The Implication

Since b = R/T < 1, the model indicates that saving allows the consumer to move income from the periods when income is high to the periods when income is low.
II. Irving Fisher’s Inter-temporal Choice of Consumption

The Inter-temporal Budget Constraint (continued)
Express S in (B) in terms of (A), we obtain C2 = (1+r)(Y1 - C1) + Y2 or C1+C2/(1+r) = Y1 + Y2/(1+r) This budget constraint can be graphed as in the figure of the next page.
II. Irving Fisher’s Inter-temporal Choice of Consumption

The Effect of Income Change (continued)
1 1+r 0 C2
(1+r)Y1+Y2
II. Irving Fisher’s Inter-tempபைடு நூலகம்ral Choice of Consumption
II. Irving Fisher’s Inter-temporal Choice of Consumption

The Effects of Interest Rate Change (continued)
II. Irving Fisher’s Inter-temporal Choice of Consumption
Macroeconomics
Lecture 12
Micro-foundation and the Behavior Analysis on Consumption
I. Introduction

The Critique to Keynesian Economics
The lacking in micro-foundation; Unable to explain growth; Unable to explain and deal with stagflation.

The Inter-temporal Budget Constraint (continued)

Important remark: Here it is assumed that the future income Y2 is known in advance when the consumer make his consumption decision at, say, the beginning of period 1.