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Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?

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  • John Sabelhaus
  • Jeffrey A. Groen
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    Abstract

    The prediction that consumption-income ratios should decline as income rises in cross-sectional data is a feature of Friedman's (1957) permanent income hypothesis and other consumption-smoothing models. The theory thus provides a link between longitudinal income data and cross-sectional expenditure data: given measured income variability and a functional relationship between consumption and permanent income, we predict cross-sectional expenditure patterns and compare those predictions to actual values. Our approach cannot explain the actual skewness in consumption-income ratios under even the strictest consumption-smoothing model, which implies that income measurement error or other anomalies are affecting the data. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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    Bibliographic Info

    Article provided by MIT Press in its journal The Review of Economics and Statistics.

    Volume (Year): 82 (2000)
    Issue (Month): 3 (August)
    Pages: 431-438

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    Handle: RePEc:tpr:restat:v:82:y:2000:i:3:p:431-438

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    Cited by:
    1. Richard Finlay & Fiona Price, 2014. "Household Saving in Australia," RBA Research Discussion Papers rdp2014-03, Reserve Bank of Australia.
    2. Mike Brewer & Ben Etheridge & Cormac O'Dea, . "Why are households that report the lowest incomes so well-off?," Economics Discussion Papers 736, University of Essex, Department of Economics.
    3. Erling Røed Larsen, 2002. "Estimating Latent Total Consumption in a Household," Discussion Papers 324, Research Department of Statistics Norway.
    4. André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2010. "How regressive are indirect taxes? A microsimulation analysis for five European countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 326-350.
    5. Arsić, Milojko & Altiparmakov, Nikola, 2013. "Equity aspects of VAT in emerging European countries: A case study of Serbia," Economic Systems, Elsevier, vol. 37(2), pages 171-186.
    6. Mike Brewer & Cormac O'Dea, 2012. "Measuring living standards with income and consumption: evidence from the UK," IFS Working Papers W12/12, Institute for Fiscal Studies.
    7. Erling Røed Larsen, 2002. "Consumption Inequality in Norway in the 80s and 90s," Discussion Papers 325, Research Department of Statistics Norway.

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