Abstract
Cross-sectionally estimated Engel curves tend to exhibit shapes that imply ultimately decreasing marginal propensities to consume as income rises. This suggests at first sight a tendency to slow down in private consumption. This tendency has to be reconsidered taking into account the fact that Engel curves usually shift significantly over time. We introduce the notion of “intertemporal propensity to consume” to shed more light on the drivers and patterns of the evolution of Engel curves. Using this notion, we are able to identify and measure the direction of the expansion path of consumption as time goes by, while controlling for household characteristics and price levels. Using German household data, we show that, over time, the intertemporal propensity to consume systematically offsets the consumption paths implied by the marginal propensity to consume that is derived cross-sectionally at one point in time. We claim that this difference between marginal and intertemporal propensity to consume should be ascribed to variations in the socioeconomic structures that occur over time and that may be linked both to the supply side (innovation and technical change) and the demand side (learning dynamics of consumers). We also show that changes in relative prices play a minor role in the evolution of Engel curves.
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Notes
Here we use the term marginal propensity to consume as referring to particular categories of goods and services, unlike the macroeconomic literature in which this term is usually associated with aggregate consumption.
The MPC so defined differs from the notion of income elasticity only in the sense that, to calculate the income elasticity of expenditure for a given level of income, both expenditure and income have to be taken in logarithms.
The shapes of cross-sectional Engel curves may be also sensitive to household characteristics, if these influence expenditure on a given category and if household characteristic change with the level of total expenditure. We estimate cross-sectional Engel curves for subgroups selected on the basis of household size, occupation of the head of the household, and age of the head of the household. The Engel curves estimated with these samples largely confirm the shapes of the Engel curves derived by pooling the households. This allows us to use the pooled data for our intertemporal analysis in the next section that requires a large cross-sectional sample size. Results are available upon request.
Results for the other member groups, which are not qualitatively different from the two-four members group, are available upon request.
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Acknowledgments
We thank Andreas Chai, Ulrich Witt and two anonymous referees for their helpful comments. We also thank André Lorentz and the audience of the International Schumpeter Society Conference held in Jena in 2014 for their comments. Finally, we thank the U.K. Central Statistical Office for making available the U.K. Family Expenditure Survey and the Expenditure and Food Survey data through the Economic and Social Data Service.
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Bruns, S.B., Moneta, A. Intertemporal propensity to consume. J Evol Econ 27, 295–314 (2017). https://doi.org/10.1007/s00191-016-0460-x
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DOI: https://doi.org/10.1007/s00191-016-0460-x