ECN 600 Lecture Notes - Lecture 6: Ricardian Equivalence, Budget Constraint, Real Interest Rate
Document Summary
C s y t y c (1 t r s. Chapter 9 -a two-period model: the consumption-savings decision and credit. Topics: consumer"s consumption/savings decision responses of consumer to changes in income and interest rates, government budget deficits and the ricardian equivalence theorem. Solve the future-period budget constraint for s: s c c c t. Substitute in the current-period budget constraint obtaining lifetime budget constraint: c t. Substitute in the current-period budget constraint obtaining lifetime budget constraint: c r. Slope-intercept: (1 c r c we (1 r. Optimization: marginal condition that holds when the consumer is optimizing: An increase in current income for the consumer: current and future consumption increase. The consumer acts to smooth consumption over time. Observed consumption-smoothing behaviour: aggregate consumption of non-durables and services is smooth relative to aggregate income, but the consumption of durables is more volatile than income.