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The sensitivity of aggregate consumption to human wealth

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  • Hasan Bakhshi
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    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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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp108.pdf
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    Bibliographic Info

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

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    Date of creation: Jan 2000
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    Handle: RePEc:boe:boeewp:108

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    Cited by:
    1. Emilio Fernandez-Corugedo & Simon Price, 2002. "Financial liberalisation and consumers' expenditure: 'FLIB' re-examined," Bank of England working papers, Bank of England 157, Bank of England.

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