The Peopling of Macroeconomics: Microeconomics of Aggregate Consumer Expenditures

www.philadelphiafed.org how individual households choose to spend and how their choices change when interest rates, the unemployment rate, and other indicators of overall economic activity change. The relationship between aggregate consumer spending and indicators of economic activity is then obtained by aggregating the predicted changes in the spending choices of individual households with respect to changes in indicators of overall economic activity. It was not always so. In the early years of macroeconomics, scholars looked for enduring empirical relationships (“economic laws”) that connected one set of macroeconomic aggregates to another without explicit reference to the individual decisions that would make sense of such connections. This was because economists hadn’t fully worked out how a household acting rationally in the face of uncertainty would behave over time — the sort of knowledge needed to meaningfully connect macroeconomic aggregates to the millions of individual choices that make up those aggregates. But as economists began to acquire this knowledge, the process of connecting macroeconomics to individuals’ behavior started in the 1950s and gathered steam in the 1970s and 1980s. Although the process of integration is far from complete, predictions of aggregate consumer spending are now rooted in predictions of individual behavior. The attempt to predict aggregate consumer spending by first predicting what individual households would do is Satyajit Chatterjee is a senior economic advisor and economist in the Research Department of the Philadelphia Fed. This article is available free of charge at www. philadelphiafed.org/research-and-data/ publications/. S BY SATYAJIT CHATTERJEE The Peopling of Macroeconomics: Microeconomics of Aggregate Consumer Expenditures*