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The sensitivity of aggregate consumption to human wealth

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Hasan Bakhshi
Abstract

The Permanent Income Hypothesis (PIH) assumes that individuals base their decisions on lifetime wealth, not current income. Textbook versions of the PIH predict that the elasticity of consumption with respect to human wealth is equal to the share of human wealth in total wealth. Comparing calibrated wealth shares with econometrically estimated elasticities amounts to a simple test of the PIH. In the United Kingdom, aggregate consumption is found to be more sensitive to changes in human wealth than is predicted by the PIH. This does not appear to be explained by a simple, but common, treatment of credit constraints.

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Paper provided by Bank of England in its series Bank of England working papers with number 108.

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Handle: RePEc:boe:boeewp:108

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  1. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May. [Downloadable!] (restricted)
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  4. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Muellbauer, John, 1997. "Income Persistence and Macro-Policy Feedbacks in the United States," CEPR Discussion Papers 1557, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Julia Darby & Jonathan Ireland, 1994. "Consumption, Forward Looking Behaviour and Financial Deregulation," Working Papers Series 94/5, University of Stirling, Department of Economics.
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  8. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October. [Downloadable!] (restricted)
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  10. repec:fth:harver:1435 is not listed on IDEAS
  11. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  12. 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. [Downloadable!] (restricted)
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  1. Emilio Fernandez-Corugedo & Simon Price, . "Financial liberalisation and consumers' expenditure: 'FLIB' re-examined," Bank of England working papers 157, Bank of England. [Downloadable!]
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