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The Effect of the Temporary and Permanent Income Shock to Household’s Consumption in Iran Using Blanchard-Quah Method

Listed author(s):
  • Mowlaei, Mohammad

    ()

    (Assistant Professor of Economics, Bu-Ali Sina University)

  • Ali, Oday

    ()

    (PhD Candidate in Economics, Bu-Ali Sina University)

Registered author(s):

    Temporary and permanent income shocks are the most important determinants of household’s consumption. According to Friedman's permanent income hypothesis, household consumption always responds to permanent income shock more than temporary shocks. Given that these two components shock separately are unobservable, in this paper we use Blanchard-Quah method to decompose the income shocks into temporary and permanent and then by applying Structural Vector Auto-regression model to identify the effect of that two shock components on household’s consumption in Iran during the 1974-2014 years. The results from the estimated model confirm the validity of the PIH in Iran. So that household consumption almost entirely explained by permanent shocks income. But it does not show sensitivity to temporary shocks.

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    File URL: http://ecoj.tabrizu.ac.ir/article_5437_62d5a500062fe7ada9ce7cbcddf6b901.pdf
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    Article provided by Faculty of Economics, Management and Business, University of Tabriz in its journal Quarterly Journal of Applied Theories of Economics.

    Volume (Year): 3 (2016)
    Issue (Month): 3 (November)
    Pages: 93-114

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    Handle: RePEc:ris:qjatoe:0052
    Contact details of provider: Web page: http://www.ecoj.tabrizu.ac.ir/

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