Autonomous Consumption
Autonomous consumption is the component of consumption expenditure that does not depend on the level of disposable income. It represents the spending that households undertake regardless of their current income, financed by drawing on past saving or by borrowing, and it is a key element of the Keynesian consumption function.
Definition
In the standard consumption function, consumption equals autonomous consumption plus the product of the marginal propensity to consume and disposable income. Autonomous consumption is the intercept of the function, the level of consumption when income is zero.
Autonomous consumption reflects the need to consume a minimum level of goods and services regardless of income, including food, shelter, and other necessities. It may be financed by past saving, by transfers, or by borrowing, and its level depends on the wealth, expectations, and credit access of households.
Role in the Multiplier
Autonomous consumption interacts with the multiplier. An increase in autonomous consumption raises equilibrium output by the amount of the increase multiplied by the multiplier, which depends on the marginal propensity to consume. The larger the marginal propensity to consume, the larger the multiplier and the effect on output.
Autonomous consumption is one of the components of autonomous expenditure, alongside autonomous investment, government spending, and exports. Changes in any of these components shift the expenditure schedule and alter equilibrium output through the multiplier mechanism.
Determinants
The level of autonomous consumption depends on several factors. Wealth affects it, since households with greater wealth have more resources available to finance consumption independent of income. Expectations about future income and about the economic environment also matter, since households that expect higher future income may consume more today.
The availability of credit affects autonomous consumption, since households that can borrow can consume more than their current income. Changes in credit conditions, including the tightening of lending standards, can reduce autonomous consumption and shift the consumption function downward.
Empirical Considerations
Estimating autonomous consumption empirically requires data on consumption and income and a specification of the consumption function. The estimates are sensitive to the specification and to the treatment of expectations, and the concept is complicated by the life-cycle behaviour of households.
The distinction between autonomous and induced consumption is useful analytically but difficult to draw precisely in practice. The components of consumption that are independent of current income vary across households and over time, and the aggregate behaviour of consumption reflects the composition of the population and the distribution of income.
Consumption Function Estimation
The estimation of the consumption function involves specifying the relationship between consumption and its determinants and estimating the parameters using data on consumption, income, and other variables. The estimates provide measures of the marginal propensity to consume and of autonomous consumption.
The estimates are sensitive to the specification and to the data used, and they vary across countries and periods. The treatment of expectations, of wealth, and of credit conditions affects the results, and the estimation must account for the endogeneity of income.
The Life-Cycle and Permanent Income Approaches
The life-cycle hypothesis and the permanent income hypothesis provide richer accounts of consumption than the simple Keynesian function. They emphasise that consumption depends on lifetime resources and on expectations of future income, not solely on current income.
These approaches imply that changes in income that are perceived as temporary have smaller effects on consumption than changes that are perceived as permanent. They also imply that consumption responds to changes in wealth and to changes in the expected stream of future income, and that the timing of income matters.
Keynesian versus Classical Views
The Keynesian view holds that consumption depends on current disposable income, with a stable relationship that supports the multiplier mechanism. The classical and new classical views emphasise the role of expectations and of lifetime resources, and they question the stability of the relationship between consumption and current income.
The debate has implications for the effectiveness of fiscal policy. If consumption responds strongly to current income, then tax cuts and transfers can stimulate demand. If consumption responds mainly to permanent income, then temporary measures have smaller effects, and the design of policy must consider the response of expectations.
Empirical Evidence
Empirical research has examined the response of consumption to income changes, distinguishing between transitory and permanent changes. The evidence suggests that consumption responds more to permanent changes, consistent with the life-cycle and permanent income approaches, but that there is also a response to transitory changes, consistent with the presence of liquidity constraints.
The evidence informs the analysis of consumption behaviour and of the effects of policy. It also informs the assessment of the multiplier and of the effectiveness of measures designed to support demand, and it highlights the importance of considering the behaviour of households in the design of fiscal and monetary policy.