John Muellbauer

Economics and Consumer Behaviour.

This classic text has introduced generations of students to the economic theory of consumer behaviour. Written by 2015 Nobel Laureate Angus Deaton and John Muellbauer, the book begins with a self-contained presentation of the basic theory and its use in applied econometrics. These early chapters also include elementary extensions of the theory to labour supply, durable goods, the consumption function, and rationing. The rest of the book is divided into three parts. In the first of these the authors discuss restrictions on choice and aggregation problems. The next part consists of chapters on consumer index numbers; household characteristics, demand, and household welfare comparisons; and social welfare and inequality. The last part extends the coverage of consumer behaviour to include the quality of goods and household production theory, labour supply and human capital theory, the consumption function and intertemporal choice, the demand for durable goods, and choice under uncertainty.

On measuring child costs: with applications to poor countries

The theoretical basis for measuring child costs is discussed, and detailed consideration is given to two straightforward procedures for calculation, Engels food share method and Rothbarths adult good method. Each of these methods embodies different definitions of child costs so that the same empirical evidence can generate quite different estimates depending on the method used. It is shown that true costs are generally overstated by Engels method and understated by Rothbarths procedure, although the latter, unlike the former, can provide a sensible starting point for cost measurement. Our estimates from Sri Lankan and Indonesian data suggest that children cost their parents about 30-40 percent of what they spend on themselves.

The Housing Market and Regional Commuting and Migration Choices

Inter-regional migration is influenced by relative employment and earnings opportunities. But strongly offsetting forces operate from relative house prices. Commuting, at least to contiguous regions, is often an alternative to migration. Relative employment and earnings opportunities should influence commuting rates in the same direction as migration rates. Given the commute/migrate trade-off, however, housing market forces should operate in the opposite direction, particularly for contiguous regions. This paper presents evidence on inter-regional commuting and migration in Great Britain which is broadly in accord with these expectations. Data for the 1980s and 1990s on net commuting are derived from the ratios of numbers of employees resident in a region to the number employed in that region using Labour Force Survey and Census of Employment data. Information on migration comes from the National Health Service Central Register. Given the evidence for the importance of portfolio demand and speculative volatility in the British housing market presented in Muellbauer and Murphy (1997), this paper documents the important transmission effects via regional labour markets, for example, increasing regional mismatch, of the forces that drive house prices in Britain. The paper suggests tax reforms which should ameliorate these problems.

House Prices and Credit Constraints: Making Sense of the US Experience

Most US house price models break down in the mid-2000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers - into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

Household composition, Engel curves and welfare comparisons between households: A duality approach

Abstract This paper is about household composition effects in consumer theory. These are important for the specification and estimation of Engel curves and demand functions. The models examined here have important applications in the areas of the measurement of cost of living indices, the study of poverty and inequality and in certain aspects of social policy. The models are based on the approach of Barten (1964). Taste differences between households are parameterized in a way which has been called simple good augmenting or simple repackaging in the literature on quality change. In this theory, changes in household composition play an analogous role to price changes. ‘True household equivalent scales’ are developed which are analogous to true cost of living indices and permit welfare comparisons across households.

Is the UK balance of payments sustainable

The UK current account deficit John Muellbauer and Anthony Murphy The UK has a large and persistent current account deficit. Policy makers argue that the deficit is easily financed, temporary and therefore not a sign of structural weakness. We examine the conditions in which it is appropriate for a country to overspend its current income with the intention of repaying loans out of future income. These include: an increase in international capital mobility, larger net holdings of foreign assets, and expectations of faster productivity growth. All three apply to the UK, so official reasoning is, in part, correct. Even so, for several decades there has been a trend deterioration of UK trade performance, most markedly in manufacturing, and we detect no underlying improvement in the 1980s. We highlight structural deficiencies in both demand and supply. On the demand side, we show the importance of rising house prices and easier consumer credit in fuelling the consumer boom to an unwarranted extent. This we trace to unjustifiable subsidies to house ownership. On the supply side, we stress vastly inadequate investment in skill formation, education and physical capital. These structural deficiencies lead us to a less optimistic view than official policy. We draw the policy lessons for the UK and consider whether continental Europe will face similar problems as financial markets are liberalized.

Surprises in the Consumption Function

The life cycle hypothesis has been the dominant theoretical basis for empirical work on the aggregate consumption function for about a quarter of a century. Under it, real consumption is proportional to real life cycle wealth where the factor of proportionality depends on real interest rate expectations and the demographic structure of the population. Life cycle wealth is the sum of financial and human wealth. However, because the latter is the present real value of the stream of labour and transfer income expected over the life cycle, it is not directly observable. This fact has led to a great variety of proxying devices in empirical applications and in consequence much looseness in the interpretation of very different models as being all consistent with life cycle theory. Indeed, one can argue that this has protected the hypothesis from being seriously tested and perhaps rejected. An insight associated with Friedman (1957) is that the view taken by consumers of life cycle income does not alter by much from period to period. Since there is greater persistence in life cycle income than in current income, this also explains the greater persistence of consumption than of current income. Intuitively, this would suggest that lagged consumption, being related to last periods perception of life cycle income which in turn is not much different from this periods perception, should have a major role in predicting current consumption. This intuition was formalised by Hall (1978) using ideas familiar from the study of stock market prices and the term structure of interest rates. Hall showed that if the real rate of interest is constant and given a number of other assumptions, including no transitory element in consumption, then the life cycle hypothesis implies that

Habits, Rationality and Myopia in the Life-Cycle Consumption Function.

This paper considers the effect both on solved out forward looking consumption functions and on Euler equations of two alternative hypotheses about habits: rational habits assume that consumers are aware of the effect of their current consumption decisions on their future marginal rates of substitution; under myopic habits, they are not aware. Demand systems evidence suggests there are important habits effects for most consumption goods, but time series models of aggregate consumption have found only a low degree of habit persistence, a result confirmed here by an analysis of quarterly U.S. data based on Euler equations. Taken together the evidence appears to favour the hypothesis of myopic habits.

The Estimation of the Prais-Houthakker Model of Equivalence Scales

Given a preference basis for the model, a households general equivalence scale is seen to be a cost of living index relative to the reference household type defined at constant prices. A maximum likelihood estimation procedure which can be applied both to cross-section data and pooled time-series/cross-sections is derived. The lack of identification of the model is established theoretically and checked empirically on British family expenditure survey data. With prior information, e.g. a nutrition based food scale, identification can be reached but ultimately the model is rendered implausible because of its zero substitution implication and the empirical results bear this out.

Credit, Housing Collateral, and Consumption: Evidence from Japan, the U.K., and the U.S.

The consumption behavior of U.K., U.S., and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral, and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S., but not Japanese, households has undergone large shifts since 1980. The average consumption-to-income ratio rose in the U.K. and U.S. as mortgage down-payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is similar in the U.S. and U.K. In Japan, land prices (which proxy house prices) continue to negatively impact consumer spending. There are negative real interest rate effects on consumption in the U.K. and U.S. and positive effects in Japan. Overall, this implies important differences in the transmission of monetary and credit shocks in Japan versus the U.S., U.K., and other credit-liberalized economies.