The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households
TLDR
This paper investigated the stochastic relation between income and consumption within a panel of about 2,000 households and found that consumption responds much more strongly to permanent than to transitory movements of income.Abstract:
We investigate the stochastic relation between income and consumption (specifically, consumption of food) within a panel of about 2,000 households. Our major findings are: 1. Consumption responds much more strongly to permanent than to transitory movements of income. 2. The response to transitory income is nonetheless clearly positive. 3. A simple test, independent of our model of consumption, rejects a central implication of the pure life cycle-permanent income hypothesis. The observed covariation of income and consumption is compatible with pure life cycle-permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent. As a general matter, our findings support the view that families respond differently to different sources of income variations. In particular, temporary income tax policies have smaller effects on consumption than do other, more permanent changes in income of the same magnitude.(This abstract was borrowed from another version of this item.)read more
Citations
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Golden Eggs and Hyperbolic Discounting
TL;DR: The authors analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received.
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Consumption and Liquidity Constraints: An Empirical Investigation
TL;DR: In this article, the authors test the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints, and the results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population.
Book ChapterDOI
Measurement Error in Survey Data
TL;DR: While standard methods will not eliminate the bias when measurement errors are not classical, one can often use them to obtain bounds on this bias, and it is argued that validation studies allow us to assess the magnitude of measurement errors in survey data, and the validity of the classical assumption.
Journal ArticleDOI
Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis
TL;DR: This paper argued that the typical household saving behavior is better described by a buffer stock model than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model.
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Risk, Financial Markets, and Human Capital in a Developing Country
TL;DR: The authors examined how child school attendance responds to seasonal fluctuations in the income of agrarian households using panel data from rural India and found that seasonal fluctuations are a form of self-insurance, but one which does not result in a substantial loss of human capital on average.
References
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Efficient capital markets: a review of theory and empirical work*
TL;DR: Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 as mentioned in this paper
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Econometric policy evaluation: A critique
Posted Content
Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence
Robert E. Hall,Robert E. Hall +1 more
TL;DR: In this paper, the marginal utility of consumption evolves according to a random walk with trend, and consumption itself should evolve in the same way, and the evidence supports a modified version of the life cycle permanent income hypothesis.
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A Theory of the Consumption Function
TL;DR: Friedman as mentioned in this paper proposed a new theory of the consumption function, tested it against extensive statistical J material and suggests some of its significant implications, including the sharp distinction between two concepts of income, measured income, or that which is recorded for a particular period, and permanent income, a longer-period concept in terms of which consumers decide how much to spend and how much they save.
Journal ArticleDOI
Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence
TL;DR: In this article, the authors show that no variable apart from current consumption should be of any value in predicting future consumption, except real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices.