Some tests for money illusion and distribution effects in the aggregate consumption function

The hypothesis that the aggregate consumption displays money illusion in the sense that consumers mistake an increase in nominal incomes for an increase in real incomes and thus consume more out of given real incomes in response to a rise in the price level and the hypothesis that the aggregate consumption depends on the distribution of income are tested using Finnish annual and quarterly data. The money illusion hypothesis is rejected by annual data, while it meets success with quarterly data. The hypothesis of distribution effects in the aggregate consumption is supported by annual data. Particularly, equalizing the distribution of income would increase the aggregate consumption. In view of the quality of data on personal income distribution this conclusion cannot be regarded as more than tentative.