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New Result in Theory of Consumption: Changes in Savings and Income Growth

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  • Cheng K. Wu

    (Fintech Research Associates)

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Abstract

Hall (1978) theorized that future consumption could be written only as a function of its current consumption. Since this result is known to be wrong in data, we reexamine, from Flavin's original equations (1981), how they may have reached this conclusion. In the Appendix, we derive a generic permanent income equation and discuss Flavin's imprecision. Furthermore, by replacing one of Flavin's three basic equations and adding the definition of savings, we find that changes in savings should also be a function of labor income growth, a solution anticipated by Modigliani and Brumberg (1952, published 1979).

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9706007.

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Length: 13 pages
Date of creation: 23 Jun 1997
Date of revision:
Handle: RePEc:wpa:wuwpma:9706007

Note: Type of Document - Word Perfect 6.0 DOS; prepared on IBM PC; to print on HP Laserjet 4; pages: 13 . In case you need, I have Flavin's two comments
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Keywords: consumption growth saving income;

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  1. 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.
  2. 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.
  3. Campbell, John & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Scholarly Articles 3221494, Harvard University Department of Economics.
  4. Modigliani, Franco, 1988. "The Role of Intergenerational Transfers and Life Cycle Saving in the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 15-40, Spring.
  5. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  6. Alan J. Auerbach & James M. Poterba, 1986. "Why Have Corporate Tax Revenues Declined?," Working papers 435, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  8. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
  9. Andrew Dean & Martine Durand & John Fallon & Peter Hoeller, 1989. "Saving Trends and Behaviour in OECD Countries," OECD Economics Department Working Papers 67, OECD Publishing.
  10. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
  11. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  12. Koenig, Evan F, 1990. "Real Money Balances and the Timing of Consumption: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 399-425, May.
  13. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  14. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  15. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  16. Sargent, Thomas J, 1978. "Rational Expectations, Econometric Exogeneity, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 673-700, August.
  17. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  18. A. Steven Englander & Charles Steindel, 1989. "Evaluating recent trends in capital formation," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 7-19.
  19. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
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  21. Robert N. McCauley & Steven A. Zimmer, 1989. "Explaining international differences in the cost of capital," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 7-28.
  22. Hooper, P. & Mann, C.L., 1989. "The Emergence And Persistence Of The U.S. External Imbalance, 1980-87," Princeton Studies in International Economics 65, International Economics Section, Departement of Economics Princeton University,.
  23. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  24. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
  25. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  26. repec:fth:harver:1435 is not listed on IDEAS
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