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Topic: Permanent income hypothesis

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	aw_miller_econtoday_12\|Student Resources\|Additional Readings\|Extended-Coverage Topics\|Chapter 12\|The Permanent-Income ...
		Permanent income is difficult to measure because there are difficulties in deciding which part of current measured income is transitory and which part is permanent.
		Friedman proposed a simple method for estimating permanent income that may approximate the method by which people themselves estimate their permanent income; this method is now referred to as the adaptive-expectations hypothesis.
		Stated differently, the permanent-income hypothesis implies that the average propensity to consume falls in booms and rises in recessions; this countercyclical tendency is inherently stabilizing.
	wps.aw.com /aw_miller_econtoday_12/0,7965,904285-,00.html (1512 words)

	OLDRICH KYN and JIRI SLAMA: CONSUMPTION FUNCTION FOR CZECHOSLOVAKIA
		The planners' permanent income hypothesis assumes that planners have their own idea about the long-run normal growth path of the economy and that they consider the level of national income corresponding in each year to such a long-run normal path to be normal or "permanent" national income.
		Because the "permanent national income" is unobservable and because it is not clear a priori exactly how planners' behavior is influenced by the ratio of transitory to permanent income, we shall estimate several alternatively specified variants of the planners' consumption function.
		We suggest that a reasonable proxy variable for the planners' "permanent" income may be the fitted value of national income from the aggregate production function and the proxy for transitory income may be the deviation of the actual national income from its fitted value.
	www.bu.edu /econ/faculty/kyn/newweb/okyn/OKpers/Empirical_Studies/Cons_FU/confu_planners.htm (1368 words)

	Intermediate Macroeconomics - Consumption
		A $1,000 increase in income raises consumption by $800.
		The expected permanent increase in income in period 1 of $30 ($15 to $45) leads to an increase in consumption of $20 (from $10 to $30).
		The permanent income hypothesis is an extension of life-cycle hypothesis.
	mason.gmu.edu /~tlidderd/311/ch10Lect.html (5647 words)

	[No title]
		Absolute vs. Permanent Income Hypothesis The Keynesian theory (known as the absolute income hypothesis) is that current real disposable income is the most important determinant of consumption in the short run.
		The permanent income hypothesis suggested by Milton Friedman in the 1950’s assumes that it is long-term income which primarily determines consumption.
		With the lifecycle and permanent models, changes in income are not likely to have much effect on life long wealth in the LCH and little effect on the PIH, unless it is a permanent change.
	www.apwt27.dsl.pipex.com /Work/mac3.doc (697 words)

	Reconciling Consumer Confidence and Permanent Income
		As a coincident indicator, it is highly correlated with the present state of the economy and is good predictor of the future income and the overall strength of the economy.
		Studies looking at sentiment often reject the PIH on the grounds that consumer confidence is a good predictor of consumption and/or that consumer confidence Granger causes consumption (Acemoglu and Scott; Matsusaka and Sbordone, 1995).
		This paper attempts to reconcile the predictive power of consumer sentiment with the permanent income hypothesis by developing a “confidence augmented” permanent income model by introducing consumer confidence as a shift term to household preferences.
	www.iaes.org /conferences/future/philadelphia_52/prelim_program/e00-1/mcintyre.htm (778 words)

	The Permanent Income Hypothesis (Site not responding. Last check: 2007-10-15)
		In empirical studies, the APC is observed to be smaller for higher income groups relative to low income groups.
		Finally, according to the PIH consumption expenditure is proportional to permanent income:
		For middle income groups the value of transitory income is equal to zero over time such that observed and permanent income take the same value:
	www.digitaleconomist.com /pih_4020.html (493 words)

	The Permanent-Income Hypothesis (Site not responding. Last check: 2007-10-15)
		The central idea of the permanent-income hypothesis, proposed by Milton Friedman in 1957, is simple: people base consumption on what they consider their "normal" income.
		Thus if they computed permanent income as the average of the past four years, and income had been $13,000, $10,000, $15,000, and $8,000, they would consider their permanent income as $11,500.
		Though our expectations of future income do not depend solely on what has happened in the past, these additional factors are almost impossible to include into attempts to test the theory with data.
	ingrimayne.saintjoe.edu /econ/FiscalDead/PermIncome.html (740 words)

	APPENDIX B (Site not responding. Last check: 2007-10-15)
		One preliminary hypothesis is that for periods of perhaps three years, it may be appropriate to use the long-run consumption function to compute the multiplier, but that for tracking the economy in the short-run, explaining and forecasting changes in measured SR-MPCs may prove critical.
		Another preliminary working hypothesis which appears fruitful --- although it is an oversimplification—is that it is the amount being multiplied, and not the multiplier value, that fluctuates.
		Consumer units may follow such a pattern through certain age and income brackets with the result that there be continuous long-run or secular dissaving in those income brackets, even if such dissaving at that phase of the life cycle and income bracket is later offset by saving in other age and income brackets.
	members.aol.com /econjustic/nber/AppendixB.htm (1532 words)

	RBA:RDP8808 Consumption and Permanent Income: The Australian Case
		This paper examines this issue by examining the role of permanent income or wealth in explaining the behaviour of aggregate consumption expenditure in Australia.
		In testing the relative explanatory power of permanent versus current income, we find that between 50 per cent and 70 per cent of consumption expenditure is consistent with the permanent income hypothesis and the remainder is explained by current income.
		It is argued in the paper that although consumption expenditure seemed unaffected by the share market crash, this outcome is still consistent with the permanent income hypothesis.
	www.rba.gov.au /PublicationsAndResearch/RDP/RDP8808.html (165 words)

	Revision Guru
		Friedman's P.I.H. In Friedman's permanent income hypothesis model, the key determinant of consumption is an individual's real wealth, not his current real disposable income.
		Permanent income is determined by a consumer's assets; both physical (shares, bonds, property) and human (education and experience).
		Only if there has been a change in permanent income will there be a change in consumption.
	www.revisionguru.co.uk /economics/consump6.htm (164 words)

	1
		What assumptions are needed so that the standard absolute income theory of consumption will generate a short run consumption curve that has a low marginal propensity to consume, but a long run consumption curve that has th3 marginal propensity to consume equal the average propensity to consume.
		The permanent income hypothesis and the life cycle hypothesis imply that a temporary decrease in value added tax would have a smaller expansionary effect than a permanent value added tax of the same magnitude.
		The permanent income hypothesis is consistent with the fact that purchases of cars and other consumer durables rise with the transitory components of income.
	econ.tu.ac.th /ee312/review/review03.htm (1862 words)

	The Tax Foundation - Permanent Income Hypothesis and the 2001 Tax Cuts
		That means changes in income people see as temporary—including one-time tax rebates—shouldn't effect behavior much.
		This paper uses unique data and features of the 2001 income tax rebates to estimate the causal effect of these rebates on household expenditure.
		So their results may be consistent with a modified version of the permanent income hypothesis after all.
	www.taxfoundation.org /blog/show/877.html (565 words)

	springhw2 (Site not responding. Last check: 2007-10-15)
		Thus, they have less total income and therefore less to spread out over their life.
		(3A) The Permanent Income Hypothesis is the claim that households base their consumption only on the amount of permanent income they have in a given year.
		Income that is not permanent (called transitory income) is saved.
	econ.la.psu.edu /econ304/springhw2.html (476 words)

	Using Spreadsheets to Explore Neoclassical Assumptions in a Keynesian Model (CHEER v14 n2)
		By integrating neoclassical elements such as the permanent income hypothesis and rational expectations theory into the model, students may directly compare the results of these schools of thought.
		The permanent income hypothesis postulates that consumption is a function of permanent income rather than current income.
		In addition, the permanent income hypothesis model exhibits no change in consumption over the business cycle; this is more consistent with real-world data than the standard Keynesian model (see any intermediate-level macroeconomics text, such as Hall and Taylor (1997)).
	www.economics.ltsn.ac.uk /cheer/ch14_2/cahill.htm (2299 words)

	NCPA - Tax Issues - A Tax Rebate Won't Raise Consumption
		This is explainable by the "permanent income hypothesis" developed by Nobel Prize-winner Milton Friedman.
		He found people tend to spend according to what they believe their permanent income is. Hence, when they got a temporary income increase, they saved it.
		Conversely, if they suffered a temporary income reduction, such as through a job loss, they borrowed to maintain their consumption.
	www.ncpa.org /pi/congress/pd032801a.html (350 words)

	Rational Expectations, by Thomas J. Sargent: The Concise Encyclopedia of Economics: Library of Economics and Liberty
		Friedman posited that people consume out of their "permanent income," which can be defined as the level of consumption that can be sustained while leaving wealth intact.
		Because of its heavy emphasis on the role of expectations about future income, his hypothesis was a prime candidate for the application of rational expectations.
		Thus, the permanent income model had the effect of diminishing the expenditure "multiplier" that economists ascribed to temporary tax cuts.
	www.econlib.org /library/Enc/RationalExpectations.html (2454 words)

	[No title]
		If that is the case, then the $5 million tax cut and increase in disposable personal income in the present is necessarily accompanied by a $5 million tax increase and reduction in disposable personal income in the future.
		There is no net increase in the lifetime disposable personal income of the population, and consequently no change in consumption expenditure in either the present or in the future.
		As a result, lifetime disposable personal income of the population will decrease by $5 million, and consumption expenditure and GDP will decrease as a result in the present and in the future.
	www-personal.umich.edu /~mschrist/102summer2001/lecture7.doc (2421 words)

	Intermediate Macroeconomics - Consumption Sample Problems
		The MPC out of a permanent change in income is the number of years working divided by the number of years expected to live.
		The MPC out of a permanent change in income is much larger than the MPC out of a temporary change in income.
		Thus, even though the current period change in income is larger in answer (B), the affect on current period consumption is much larger for answer (A).
	mason.gmu.edu /~tlidderd/311/ch13Prob.html (483 words)

	[No title] (Site not responding. Last check: 2007-10-15)
		In extending the Life Cycle-Permanent Income hypothesis, where an agent maximizes its utility based upon its assets, present and expected future labor income, Hall (1978) theorized that future consumption could be written only as a function of its current consumption; in effect, weakening the link between changes in income and consumption.
		Under the same initial conditions, we show that the permanent income for the period t+1 should have the sum of incomes varying from period 1 to infinite instead of 0 to infinite, i.e.
		the loss of one labor income should be partially compensated for by an increase in assets (in the Appendix, we derive a generic permanent income equation and also discuss Flavin's possible mispecification).
	econwpa.wustl.edu:8089 /eps/mac/papers/9706/9706007.html (2020 words)

	PublishedPapers
		Friedman’s Permanent Income Hypothesis (PIH) predicts that the income elasticity of consumption should be higher for households for whom a large fraction of the variation of their income is permanent than for households experiencing more transitory variations in income.
		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 aggregate implications of the permanent income/life cycle hypothesis (PILCH) are derived rigorously.
	www4.ncsu.edu /~jjseater/Pages/PublishedPapers.html (3060 words)

	FRB Minneapolis Research Archive - The Permanent Income Hypothesis Revisited (Site not responding. Last check: 2007-10-15)
		This paper develops and tests two variants of the permanent income model that are consistent with this fact.
		This suggests that the martingale hypothesis may yet be a useful way to conceptualize the relationship between aggregate quarterly U.S. consumption and income.
		According to the second variant of the permanent income model, serial persistence in measured consumption reflects the effects of exogenous technology shocks and time aggression.
	minneapolisfed.org /research/sr/sr129.html (220 words)

	RAND \| Advanced Publication Search \| View Abstract
		Resolution of the importance of the current income/permanent income distinction has important implications for understanding habit and lags in consumption behavior and the efficacy of short-run macroeconomic policies.
		The validity of the hypothesis that permanent consumption is proportional to permanent income (proportionality hypothesis) has an important bearing on the controversy regarding the trade-off between growth and equity in developing countries.
		This report extends the permanent income hypothesis to allow for the presence of pure measurement error in the major variables.
	www.rand.org /cgi-bin/Abstracts/e-getabbydoc.pl?R-2132 (190 words)

	Integrating the Keynesian Relationships
		As the simple Keynesian consumption function predicted that as income rose, savings would take an ever greater share of it, efforts were needed to come up with a "better" consumption function.
		In other words, households were faced with a forecasted "income stream" which they attempted to allocate over their lifetime.
		The implication, then, is that temporary increases in income will not have much of an effect of consumption behavior but rather be accumulated as savings, whereas changes in the expected income stream (permanent income) will lead to substantial changes in consumption.
	cepa.newschool.edu /het/essays/keynes/relationships.htm (4587 words)

	Economics Interactive
		A land tax is a tax on the value of land or a proportion of the rental income from land, and not a tax on any improvements to land.
		The life-cycle hypothesis is a theory developed by Nobel-Prize winner Franco Modigliani that people try to smooth the level of consumption over their lives, borrowing when they are young and their incomes are low, saving when they are established workers with higher incomes, and then spending their savings after they retire.
		The lost income costs of unemployment are the values of the output the unemployed could have produced.
	www.unc.edu /depts/econ/byrns_web/Economicae/EconomicaeL.htm (3565 words)

	[No title]
		If cocoa farmers set consumption according to the permanent income hypothesis, we should expect to see, a rise in Ghana’s national savings and an increase in Ghana’s capital account.
		The income in period 0 is Y0 = 100 and the income in period 2 is Y1 = 440.
		Calculate the level of consumption and savings in the first period under the permanent income hypothesis.
	home.ust.hk /~davcook/PracticeFinalExam.doc (1404 words)

	MSN Encarta - Search Results - permanent-income hypothesis
		After the decline of the subsistence theory, attention shifted to demand for labor as a wage determinant.
		All science experiments follow the scientific method, the step-by-step process that guides thinking and discovery.
		identifying a hypothesis, negating a hypothesis, testing for true statements, writing a hypothesis, writing conditional statements
	encarta.msn.com /permanent-income+hypothesis.html (155 words)

	Abstract for CFDP 725 (Site not responding. Last check: 2007-10-15)
		These studies assume that income is stationary around a deterministic trend.
		The data, however, do not reject the hypothesis that disposable income is a random walk with drift.
		If income is indeed a random walk, then the standard testing procedure is greatly biased toward finding excess sensitivity.
	www.econ.yale.edu /cowles/P/ab/a07/a0725.htm (169 words)

	Macroeconomics \| Quick Quiz
		The life-cycle hypothesis and permanent income hypothesis make strikingly different claims about forward-looking consumption function
		People save more than the permanent income theory suggests because they wish to leave inheritances for their children
		According to the permanent income hypothesis, which of the following is likely to happen if Liberal Government in Ottawa gives a tax-cut before election (but people expect tax-hike after Liberal Party forms the government),
	highered.mcgraw-hill.com /sites/0070890455/student_view0/chapter15/quick_quiz.html (700 words)

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