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Milton Friedman and the Emergence of the Permanent Income Hypothesis

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  • Hsiang-Ke Chao

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    (University of Amsterdam)

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    Abstract

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

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    File URL: http://papers.tinbergen.nl/01053.pdf
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    Bibliographic Info

    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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    1. Sayer, Stuart, 1989. " Macroeconomic Theory and Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 3(4), pages 353-74.
    2. Harold W. Watts, 1960. "An Objective Permanent Income Concept for the Household," Cowles Foundation Discussion Papers 99, Cowles Foundation for Research in Economics, Yale University.
    3. 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.
    4. 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.
    5. 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.
    6. Milton Friedman & Simon Kuznets, 1954. "Income from Independent Professional Practice," NBER Books, National Bureau of Economic Research, Inc, number frie54-1, October.
    7. Griliches, Zvi, 1974. "Errors in Variables and Other Unobservables," Econometrica, Econometric Society, vol. 42(6), pages 971-98, November.
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