Milton Friedman and the Emergence of the Permanent Income Hypothesis

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Milton Friedman and the Emergence of the Permanent Income Hypothesis

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Hsiang-Ke Chao () (University of Amsterdam)

Abstract

The purpose of this paper is to investigate the evolution of Milton Friedman's permanent income hypothesis from the 1940s to 1960s, and how it became the paradigm of modern consumption theory. Modelling unobservables, such as permanent income and permanent consumption, is a long-standing issue in economics and econometrics. While the conventional approach has been to set an empirical model to make "permanent income" measurable, the historical change in the meaning of that theoretical construct is also of methodological interest. This paper will show that the concepts of unobservables, especially permanent income, in Friedman's work was fluid and depended on the instruments used.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-053/1.

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Date of creation: 13 Jun 2001
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Handle: RePEc:dgr:uvatin:20010053

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This paper has been announced in the following NEP Reports:

NEP-ALL-2001-07-13 (All new papers)
NEP-HPE-2001-07-13 (History & Philosophy of Economics)

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Milton Friedman & Simon Kuznets, 1954. "Income from Independent Professional Practice," NBER Books, National Bureau of Economic Research, Inc, number frie54-1, April.
Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December. [Downloadable!] (restricted)
Darby, Michael R, 1972. "The Allocation of Transitory Income Among Consumers' Assets," American Economic Review, American Economic Association, vol. 62(5), pages 928-41, December. [Downloadable!] (restricted)
Harold W. Watts, 1960. "An Objective Permanent Income Concept for the Household," Cowles Foundation Discussion Papers 99, Cowles Foundation, Yale University. [Downloadable!]
Sayer, Stuart, 1989. " Macroeconomic Theory and Policy," Journal of Economic Surveys, Blackwell Publishing, vol. 3(4), pages 353-74.
Kim, Jinbang & De Marchi, Neil & Morgan, Mary S., 1995. "Empirical model particularities and belief in the natural rate hypothesis," Journal of Econometrics, Elsevier, vol. 67(1), pages 81-102, May. [Downloadable!] (restricted)
Griliches, Zvi, 1974. "Errors in Variables and Other Unobservables," Econometrica, Econometric Society, vol. 42(6), pages 971-98, November. [Downloadable!] (restricted)

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