Stagflation and stability of the Keynesian consumption function: an empricial analysis

Abstract

In macroeconomics, consumption functions supposedly demonstrate stable relationships between consumption and disposable income. This letter constructs a simple consumption function of Keynesian type. It also estimates the function and tests if any structural change had taken place in this function in 1974 following the beginning of the stagflationary era caused by the great oil-crunch of the early 1970s. The estimation and testing follow standard statistical procedures and use annual time series data for Canada (1947–78). The findings suggest that the Keynesian function for Canada had not undergone any significant structural change in 1974. The function was found quite stable in terms of intercept as well as slope parameters.