Testing the Fundamental Equations of the Permanent Income Hypothesis (original) (raw)

The permanent income hypothesis

Journal of Monetary Economics, 1999

Consumption Euler relations are estimated with data from the 1986-1991 US Consumer Expenditure Survey without creating a synthetic panel. The stochastic implications of the permanent income hypothesis generally are not rejected, and there is little evidence of liquidity-constrained or rule-of-thumb behavior. The results are robust with respect to consumption category, changes in sample, and choice of instruments. 1999 Elsevier Science B.V. All rights reserved.

Aggregate consumption behavior and the permanent income hypothesis

Economics Letters, 1993

This paper shows that the random walk behavior of real aggregate consumption is unrelated to Hall's rational choice model. The result implies that random walk behavior of macroeconomic aggregates is something quite general which need have little relation to the optimizing behavior of individual agents.

Explaining the Independence of Consumption and Income Using Permanent Income Hypothesis

Explaining the Independence of Aggregate Consumption of Aggregate Income, 2023

In economics we view consumption and income from two perspectives: Individual (Micro) perspective which involve the consumptions and Incomes (Personal Income) of each individual units in the economy and the Aggregate (Macro) perspective which involve the total consumption and income (GDP) of every economic agent. Based on the individual perspective of consumption and income, Economic theories have been built. These theories have shown the existence of dependence of household consumption on personal income or disposable personal income which is described as personal income excluding taxes i.e. (Personal income-Taxes).

Measuring noise in the Permanent Income Hypothesis

Journal of Macroeconomics, 2002

Based on a number of Ôdeviation measuresÕ, Kim (International Economic Review 37 (1996) 205) finds that postwar US consumption deviates from the Permanent Income Hypothesis (PIH) by only around 4%. In the present paper we investigate in more detail the extent to which the PIH provides a good approximation to US consumption data. We point out some unappealing features in the methods suggested by Kim, and we propose a method that does not have these drawbacks. In particular, we argue that due to the non-stationarity that characterizes consumption and income, deviation measures should be expressed in terms of saving rather than consumption. By applying our proposed method we find that, although it is possible to come up with a particular version of the PIH that leads to small deviations, in general US saving deviates from PIH saving by substantially more than 4%.

Testing the cross-section implications of Friedman's permanent income hypothesis

Journal of Monetary Economics, 2007

We use modern household data and econometric methods to conduct some of the original tests of the Permanent Income Hypothesis (PIH) suggested and used by Friedman (1957). The data and methods are superior to those available to Friedman, allowing us to refine Friedman's tests and perform tests he could not do. The results provide overall but not universal support for PIH.

Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence

1. Obviously, these assumptions can be justified only as an approximation. One can obtain the random walk result with other sorts of approximations as well, e.g., the Taylor approximation in Mankiw (1981) or the log-normality assumption in Hansen and Singleton (1983). These other approximations may imply that the log of consumption, rather than the level, is a random walk-a more appealing specification. They also often introduce other terms, such as the difference between 6 and r and the variance of consumption growth; these other terms are usually included as part of the constant drift in consumption.

Testing the permanent-income hypothesis: new evidence from West-German states ( L�nder </b

Empir Econ, 2006

This paper investigates whether time-series data from eleven West-German states (Länder) provide evidence in accord with the implication of the permanent-income hypothesis (PIH) for the stochastic relationship between consumption and income innovations. The empirical results do not support this hypothesis. In particular, the response of consumption to income innovations is found to be much weaker than is predicted by the PIH. Moreover, the response was found to be asymmetric, being stronger for negative than positive income innovations. This evidence of asymmetry is qualitatively consistent with models in which consumers are liquidity constrained.