The Consumer Expenditure Function

Abstract

A consumer expenditure function which integrates pure consumption and household investment in durable goods is formulated and estimated. Because of reduced reliance on the official classification of commodities as durable or nondurable, a considerable increase in ability to explain consumer expenditures results as compared to multiequation models. Further empirical investigation provides strong evidence that: (1) private sector income is significantly better than disposable personal income for explaining consumer expenditures, (2) the M1 definition of money is similarly superior to both M2 and M3 definitions, and (3) the weight of current income in permanent income is about 10% per annum. Data appendix included.