Date of Award

Spring 2012

Degree Name

Bachelor of Science

Major

Economics

First Advisor

Mark Setterfield

Second Advisor

Yun Kyu Kim

Abstract

Since the outbreak of the financial crisis in 2008, high household consumption that was previously boosted by debt-financing has shrunk significantly. The validity of conventional models of consumption that are mainly based on the life-cycle hypothesis has thus been called into question. This thesis utilizes empirical analysis to test the explanatory power of a modified Keynesian consumption function that captures household balance sheet movements. In addition to a short run OLS model, a VEC model and a DOLS model are constructed to examine the long run cointegrating relationship between consumption and other macroeconomic variables. Neither the regression results of the short run model nor those of the long run models are compatible with the life-cycle hypothesis. Theories based on relative consumption perform more satisfactorily in explaining the estimating results.

Comments

Senior thesis completed at Trinity College for the degree of Bachelor of Science in Economics.

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