Inflation and the Consumption Function
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Nominal interest payments that come as a compensation for a fall in the real value of monetary assets can hardly be counted as income, if that variable is to have economic content. In spite of this obvious fact, and in a time when consumers are quite often modeled as being extremely rational, most econometric studies still use the disposable income data as if they were a good approximation of an economically meaningful variable even in times of inflation. Both theoretical and empirical work indicate that this is not the case. Perhaps the fact that the empirical work performed also has remarkably good prediction properties will help make econometricians think more carefully about the economic content of the data series they use.
KeywordsDisposable Income Income Variable Consumption Function Meaningful Variable Econometric Test
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