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Permanent income hypothesis and variability of consumption

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  • Timo Koivumäki

    (Department of Economics, University of Oulu)

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    Abstract

    This paper investigates the variability of Finnish consumption with a purpose to determine whether traditional permanent income hypothesis is consistent with Finnish consumption data, or is consumption excessively smooth as suggested in recent empirical studies. A spectral density based measure is used to determine the variability ratios for nondurables consumption and durables expenditures. Results show strong excess smoothness in durables expenditures, and slight excess smoothness in nondurables consumption. The issue of excess smoothness is also approached using cross spectral analysis. The role of features such as liquidity constraints, uncertainty and irreversibility of durables stock in causing excess smoothness is discussed.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/f1996_2d.pdf
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    Bibliographic Info

    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 9 (1996)
    Issue (Month): 2 (Autumn)
    Pages: 144-154

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    Handle: RePEc:fep:journl:v:9:y:1996:i:2:p:144-154

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    Web page: http://www.taloustieteellinenyhdistys.fi
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    1. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
    2. Kenneth D. West, 1987. "The Insensitivity of Consumption to News About Income," NBER Working Papers 2252, National Bureau of Economic Research, Inc.
    3. Gali, Jordi, 1993. "Variability of Durable and Nondurable Consumption: Evidence for Six O.E.C.D. Countries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 418-28, August.
    4. Gali, Jordi, 1991. "Budget Constraints and Time-Series Evidence on Consumption," American Economic Review, American Economic Association, vol. 81(5), pages 1238-53, December.
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