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Do consumers behave as the life-cycle/permanent-income theory of consumption predicts?


  • Jeffrey C. Fuhrer


Widely accepted theories of consumer behavior suggest that consumers act according to a lifetime budget, spending against future earnings so long as they are predictable. Yet this study finds that many consumers respond to changes in income only when they are realized. Furthermore, adjustment costs lead to deviations in the short run from the Life-Cycle/Permanent-Income path. ; These findings suggest that some temporary economic policies may have a larger impact on consumption than LC/PI theory predicts, since consumers do not or cannot spread out the effects over their lifetime. Conversely, permanent policies may have more sluggish results than the theories predict, as consumers require time to adjust consumption to the new level of lifetime resource

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedbne:y:1992:i:sep:p:3-14

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    References listed on IDEAS

    1. Gali, Jordi, 1991. "Budget Constraints and Time-Series Evidence on Consumption," American Economic Review, American Economic Association, vol. 81(5), pages 1238-1253, December.
    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 971-987, December.
    3. Goodfriend, Marvin, 1992. "Information-Aggregation Bias," American Economic Review, American Economic Association, vol. 82(3), pages 508-519, June.
    4. Simon Kuznets, 1942. "Uses of National Income in Peace and War," NBER Chapters,in: Uses of National Income in Peace and War, pages 1-45 National Bureau of Economic Research, Inc.
    5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    6. 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.
    7. repec:fth:harver:1435 is not listed on IDEAS
    8. Charles R. Bean, 1986. "The Estimation of "Surprise" Models and the "Surprise" Consumption Function," Review of Economic Studies, Oxford University Press, vol. 53(4), pages 497-516.
    9. 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 1249-1273, November.
    10. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    11. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, January.
    12. Engle, R.F. & Yoo, B.S., 1989. "Cointegrated Economic Time Series: A Survey With New Results," Papers 8-89-13, Pennsylvania State - Department of Economics.
    13. 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.
    14. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
    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.
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    Cited by:

    1. Roy H. Webb, 1993. "Personal saving behavior and real economic activity," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 68-94.
    2. Jeffrey C. Fuhrer, 1993. "What role does consumer sentiment play in the U.S. macroeconomy?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 32-44.

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