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Why is Consumption So Smooth?

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  • John Campbell
  • Angus Deaton

Abstract

For thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income. This paper considers the evidence for the contrary position, that permanent income is in fact less smooth than measured income, so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory. The paper argues that in postwar U.S. quarterly data, consumption is smooth because it responds with a lag to changes in income.

Suggested Citation

  • John Campbell & Angus Deaton, 1989. "Why is Consumption So Smooth?," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 357-373.
  • Handle: RePEc:oup:restud:v:56:y:1989:i:3:p:357-373.
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