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Consumption Growth Parallels Income Growth: Some New Evidence

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  • Chris Carroll
  • Lawrence H. Summers

Abstract

This paper argues that the versions of both permanent income and life-cycle theories which have recently become fashionable are inconsistent with the grossest features of cross-country and cross-section data on consumption and income. There is clear evidence that consumption and income growth are much more closely linked than would be predicted by these theories. it appears that consumption smoothing takes place over periods of several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income component is not to be regarded as expected lifetime earnings... It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness." They call into question the usefulness of standard representative Consumer approaches to the analysis of saving behavior. And they call for increased emphasis on liquidity constraints and short run precautionary saving as determinants of consumption behavior.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3090.

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Date of creation: Sep 1989
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Publication status: published as National Saving and Economic Performance, eds. B. Douglas Bernheimand and John Shoven. Chicago: The University of Chicago Press, 1991. pp305-343.
Handle: RePEc:nbr:nberwo:3090

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Robert J. Barro, 1991. "A Cross-Country Study of Growth, Saving, and Government," NBER Chapters, in: National Saving and Economic Performance, pages 271-304 National Bureau of Economic Research, Inc.
  3. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  4. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  5. repec:fth:harver:1435 is not listed on IDEAS
  6. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-32, August.
  7. Deaton, A., 1989. "Saving in Developing Contries: Theory and Review," Papers 144, Princeton, Woodrow Wilson School - Development Studies.
  8. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  9. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
  10. 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.
  11. Gilbert Ghez, 1975. "Education, the Price of Time, and Life-Cycle Consumption," NBER Chapters, in: Education, Income, and Human Behavior, pages 295-312 National Bureau of Economic Research, Inc.
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Blog mentions

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  1. Thinking Clearly about Inequality
    by Mike in Rortybomb on 2009-07-20 15:17:19
  2. Performing Consumption Smoothing
    by Mike in Rortybomb on 2009-05-29 19:01:10
  3. Financial Regulation Is Good รข?? But Consumer Financial Protection Is Better
    by Mike Derham in the progressive fix on 2010-02-25 19:52:55
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