November 1987 | Campbell, John Y., and N. Gregory Mankiw
This paper reexamines the consistency of the permanent income hypothesis with post-war U.S. data. The authors estimate that a significant fraction (40-50%) of individuals consume their current income rather than their permanent income, indicating a substantial departure from the permanent income hypothesis. This finding is robust to various statistical issues and cannot be easily explained by changes in the real interest rate or non-separability in the utility function. The authors use an instrumental variables approach to estimate the fraction of individuals who consume their current income and test the permanent income hypothesis. They find strong evidence against the hypothesis, with estimates of this fraction ranging from 0.35 to 0.65. The results are consistent across different specifications and instruments, including lagged income growth, lagged consumption growth, and financial variables. The paper also examines generalizations of the permanent income hypothesis, such as changes in the real interest rate and non-separability in the utility function, but finds no evidence that these factors can explain the observed deviations from the hypothesis.This paper reexamines the consistency of the permanent income hypothesis with post-war U.S. data. The authors estimate that a significant fraction (40-50%) of individuals consume their current income rather than their permanent income, indicating a substantial departure from the permanent income hypothesis. This finding is robust to various statistical issues and cannot be easily explained by changes in the real interest rate or non-separability in the utility function. The authors use an instrumental variables approach to estimate the fraction of individuals who consume their current income and test the permanent income hypothesis. They find strong evidence against the hypothesis, with estimates of this fraction ranging from 0.35 to 0.65. The results are consistent across different specifications and instruments, including lagged income growth, lagged consumption growth, and financial variables. The paper also examines generalizations of the permanent income hypothesis, such as changes in the real interest rate and non-separability in the utility function, but finds no evidence that these factors can explain the observed deviations from the hypothesis.