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In this note, we reexamine an anomaly that appeared in estimates of the post-1973 textbook Keynesian consumption function as first reported in this journal by Shapiro (1988). The anomaly is the nearly unit value of the marginal propensity to consume and the significant negative intercept term obtained in post-1973 estimates. This result is contrary to the earlier estimates of the Keynesian consumption function and to the traditional Keynesian assumptions. We consider the possibility that the anomaly is due to omitted variable bias. By incorporating variables like the real rate of interest, the expected rate of inflation, and lagged wealth, the anomaly disappears. These variables have thus assumed more importance in explaining consumption as the U.S. economy became more volatile in the early 1970s.
The American Economist is a leading refereed journal published by the International Honor Society in Economics – Omicron Delta Epsilon – for the enhancement of research in economics. It publishes articles in all areas of economics, particularly in economic education. The Journal publishes a combination of theoretical and empirical articles as well as shorter notes, book reviews and comments on published papers.
Sara Miller McCune founded SAGE Publishing in 1965 to support the dissemination of usable knowledge and educate a global community. SAGE is a leading international provider of innovative, high-quality content publishing more than 900 journals and over 800 new books each year, spanning a wide range of subject areas. A growing selection of library products includes archives, data, case studies and video. SAGE remains majority owned by our founder and after her lifetime will become owned by a charitable trust that secures the company’s continued independence. Principal offices are located in Los Angeles, London, New Delhi, Singapore, Washington DC and Melbourne. www.sagepublishing.com
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