Private Consumption Behaviour

Following Ando and Modigliani’s (1963) specification, the determinants of private consumption in MM are the current values of disposable labour income (inclusive of transfers) and of non-human wealth. This consumption function is built in two stages. In the first an equilibrium consumption level is specified to depend on the two variables just mentioned. In the second, a dynamic equation is developed which allows for partial adjustment in the short run. In developing the consumption function, care is taken to ensure that the growth rate of real consumption converges in the long run to the natural growth rate of the economy.