SURVEY EXPECTATIONS IN THE TIME-SERIES CONSUMPTION FUNCTION

This paper introduces survey-based measures of expectations and uncertainties about income and real interest rates into an otherwise conventional consumption function. The survey data contribute more than conventional variables to the explanation of changes in consumption. The hypothesis that consumption follows a random walk is rejected in favor of a model in which consumption responds with a lag to changes in expected income growth. The significance of inflation in earlier estimates of the U.S. consumption function is shown to be spurious, and due to a strong negative correlation between expected inflation and expected income growth.