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Budget Constraints and Time-Series Evidence on Consumption

Author

Listed:
  • Gali, Jordi

Abstract

Is consumption more or less variable than predicted by the permanent-income hypothesis? To answer that question, the author develops a procedure based on a long-run restriction implied by the consumer's intertemporal budget constraints. In contrast to previous work, the approach here (1) does not require any assumptions on the stochastic properties of labor income, (2) does not impose restrictions on the consumer's information set, and (3) is robust to departures from the permanent-income-hypothesis model. The application of the procedure to postwar U.S. data suggests that consumption is smoother than the permanent-income-hypothesis model predicts. Copyright 1991 by American Economic Association.

Suggested Citation

  • Gali, Jordi, 1991. "Budget Constraints and Time-Series Evidence on Consumption," American Economic Review, American Economic Association, vol. 81(5), pages 1238-1253, December.
  • Handle: RePEc:aea:aecrev:v:81:y:1991:i:5:p:1238-53
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    Cited by:

    1. Engsted, Tom, 2002. "Measuring noise in the Permanent Income Hypothesis," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 353-370, September.
    2. Orazio P. Attanasio & Nicola Pavoni, 2011. "Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption," Econometrica, Econometric Society, vol. 79(4), pages 1027-1068, July.
    3. Ostergaard, C. & Sorensen, B.E. & Yosha, O., 1998. "Permanent Income, Consumption, and Aggregate Constraints: Evidence from US States," Papers 02-98, Tel Aviv.
    4. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
    5. Normandin, Michel, 1993. "Épargne de précaution et revenu de travail incertain : un survol de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 69(4), pages 347-364, décembre.
    6. Jim Malley & Hassan Molana, "undated". "The Permanent Income Hypothesis Revisited: Reconciling Evidence from Aggregate Data with the Representative Consumer Behaviour," ICMM Discussion Papers 48, Department of Economics University of Strathclyde.
    7. Han, Chang-Keun & Sherraden, Michael, 2009. "Do institutions really matter for saving among low-income households? A comparative approach," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(3), pages 475-483, June.
    8. Jim Malley & Hassan Molana, 2002. "The Life-Cycle-Permanent-Income Model: A Reinterpretation and Supporting Evidence," Working Papers 2002_17, Business School - Economics, University of Glasgow.
    9. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486, October.
    10. Jeffrey C. Fuhrer, 1992. "Do consumers behave as the life-cycle/permanent-income theory of consumption predicts?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-14.
    11. Amir Kia, 2005. "Sustainability of the Fiscal Process in Developing Countries- Egypt, Iran and Turkey: A Multicointegration Approach – revised version: Fiscal Sustainability in Emerging Countries: Evidence from Iran a," Carleton Economic Papers 05-08, Carleton University, Department of Economics, revised Nov 2008.
    12. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
    13. Charlotte Ostergaard & Bent E. Serensen & Oved Yosha, 2002. "Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 634-645, June.
    14. Lee, Taeyol, 1993. "The excess smoothness puzzle in consumption," ISU General Staff Papers 1993010108000011471, Iowa State University, Department of Economics.
    15. Amir Kia & Norman Gardner, 2009. "Analyzing the Fiscal Process under a Stochastic Environment: Evidence from Egypt," Working Papers 475, Economic Research Forum, revised Mar 2009.
    16. Amir KIA, "undated". "Analyzing the Fiscal Process Under a Stochastic Environment: Evidence From Egypt," EcoMod2009 21500053, EcoMod.
    17. Jim Malley & Hassan Molana, 1999. "The Permanent Income Hypothesis Revisited," Dundee Discussion Papers in Economics 105, Economic Studies, University of Dundee.
    18. Gordon de Brouwer, 1996. "Consumption and Liquidity Constraints in Australia and East Asia: Does Financial Integration Matter?," RBA Research Discussion Papers rdp9602, Reserve Bank of Australia.
    19. Yulei Luo, 2005. "Consumption Dynamics, Asset Pricing, and Welfare Effects under Information Processing Constraints," 2005 Meeting Papers 345, Society for Economic Dynamics.
    20. Jim Malley & Hassan Molana, 2003. "The Life-Cycle-Permanent- Income Hypothesis: A Reinterpretation and Supporting Evidence," Dundee Discussion Papers in Economics 138, Economic Studies, University of Dundee.
    21. repec:pri:wwseco:dp232 is not listed on IDEAS
    22. R. MacDonald & Hassan Molana, 2000. "Does Consumption Deviate from the Permanent Income Path? An Empirical Study of UK Data," Dundee Discussion Papers in Economics 107, Economic Studies, University of Dundee.
    23. Timo Koivumäki, 1996. "Permanent income hypothesis and variability of consumption," Finnish Economic Papers, Finnish Economic Association, vol. 9(2), pages 144-154, Autumn.
    24. repec:eee:macchp:v2-2493 is not listed on IDEAS

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