Testing for the manifestation of consumption asymmetries across vulnerable and non-vulnerable economies

Abstract

Mainstream theory on aggregate demand conveys that consumption reacts symmetrically to positive and negative shocks in current income of the same extent. As a result, the marginal propensity of consumption and the corresponding multiplier process follow a linear pattern. The symmetry of aggregate demand presumed by conventional economic theory portrays the manifestation of smooth and symmetric business-cycles. Modern theory on aggregate demand challenges the conventional presupposition of symmetric business-cycles. Indeed, the application of new methodological approaches to macroeconomic datasets shows that consumption reacts asymmetrically to exogenous positive and negative changes in income of the same extent. Consequently, the non-linearity of the marginal propensity of consumption and the corresponding multiplier process develop asymmetric business-cycles. Theoretical underpinnings convey that consumption asymmetries arise either due to liquidity constraints or loss aversion.