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Do Changes In Current Income Help To Explain Changes In Consumption In Israel?

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  • Yaacov Lavi

    (Bank of Israel)

Abstract

This paper examines the extent to which the rate of change of private consumption (per capita) can be forecast on the basis of the rates of change of predictable income and the rate of return on assets-share yields and short-term interest. As is well known, a strong link between a change in private consumption and in predictable income contradicts the permanent income hypothesis with rational expectations. The empirical test focuses on the period between 1963 and 2000, by enlarging our previous sample which lasted in 1993. The main empirical result of this study shows the considerable effect of the rate of change of predictable wage income on consumption-around 0.5. In other words, half the population seems to set its consumption on the basis of changes in current income. Another finding is the significant effect of the rate of return on shares on consumption, although its elasticity is relatively small. Including in the sample the large-scale immigration wave from former USSR mildly increased, as expected, the income elasticity, and it slowed the speed of adjustment of consumption to permanent income.

Suggested Citation

  • Yaacov Lavi, 2003. "Do Changes In Current Income Help To Explain Changes In Consumption In Israel?," Israel Economic Review, Bank of Israel, vol. 1(2), pages 113-135.
    • Handle: RePEc:boi:isrerv:v:1:y:2003:i:2:p:113-135
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    References listed on IDEAS

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    3. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank, Research and Statistics Department.
    4. Guha Brishti & Guha Ashok S, 2008. "Target Saving in an Overlapping Generations Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-26, March.
    5. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.

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