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Consumption Growth Parallels Income Growth: Some New Evidence

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Author Info
Chris Carroll
Lawrence H. Summers

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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 crosssection data on consumption and income. There is clear evidence tha: consumption and income gr:wth are much more closely linked than wOu be predicted by these theories. it appears that consumption smoothing takes place over periods cf several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income corrpcnent 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 apprcaches 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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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 Christopher D. Carroll, Lawrence H. Summers. "Consumption Growth Parallels Income Growth: Some New Evidence," in B. Douglas Bernheim and John B. Shoven, editors, "National Saving and Economic Performance" University of Chicago Press (1991)
Handle: RePEc:nbr:nberwo:3090

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. 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)
  3. Deaton, A., 1989. "Saving in Developing Contries: Theory and Review," Papers 144, Princeton, Woodrow Wilson School - Development Studies.
  4. 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. [Downloadable!] (restricted)
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  5. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December. [Downloadable!] (restricted)
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  7. repec:fth:harver:1435 is not listed on IDEAS
  8. 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. [Downloadable!]
  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. [Downloadable!] (restricted)
  10. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  11. Robert J. Barro, 1989. "A Cross-Country Study of Growth, Saving, and Government," NBER Working Papers 2855, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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