David Andolfatto has a post “Whither the consumer?” His important chart is a version of this one:
So, residential investment behaves largely like other forms of investment, except that it is considerably more volatile. In particular, the recovery dynamic for residential investment looks like what one might expect, given the large negative shock in that sector. And yet consumer spending continues to fall away from its historical trend, even as residential investment recovers (albeit, slowly).
Can someone point me to a theoretical model that generates this type of consumption-investment dynamic during a recovery?
I would suggest he take a closer look at his first chart, a version of which below:
Looking at the period after 2007, we may see where this unfamiliar consumption-investment dynamic is coming from. Real output has dropped relative to trend by an order of magnitude greater than at any other time and, apparently, refuses to regain its former ‘status’.
Wouldn´t that be the natural outcome of a driving process – nominal spending (NGDP) – that remains depressed?
The “theoretical model” that generates this type of consumption investment dynamic goes by the name of “very bad monetary policy” i.e., one that forgets that good results come from securing nominal stability!