The article deals with the problem of how strongly fears of negative shocks in consumption are justified by the theory of economics - even if one does not take into account their long term effects. The analysis uses simple Keynesian aggregative models, i.e. models which focus on the short term. The article, firstly, determines the maximal scale of short term drop in product level in the response to negative shock in private consumption, the scale being implied by these models. Secondly, it indicates channels (other than one leading to price adjustments), which are likely to ease direct adverse impact of negative shocks in private consumption on short term product level. Lastly, it shows that such shocks do not necessarily have to lead to lower short term product level, even if one assumes completely sticky prices and restricts the analysis exclusively to the demand side of an economy.

Keywords: saving, consumption, aggregative models.

  Andrzej Rzońca, Paradox of Paradox of Thrift - plik pdf; (238 KB)