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Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?

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  • John Sabelhaus
  • Jeffrey A. Groen

Abstract

The prediction that consumption-income ratios should decline as income rises in cross-sectional data is a feature of Friedman's (1957) permanent income hypothesis and other consumption-smoothing models. The theory thus provides a link between longitudinal income data and cross-sectional expenditure data: given measured income variability and a functional relationship between consumption and permanent income, we predict cross-sectional expenditure patterns and compare those predictions to actual values. Our approach cannot explain the actual skewness in consumption-income ratios under even the strictest consumption-smoothing model, which implies that income measurement error or other anomalies are affecting the data. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • John Sabelhaus & Jeffrey A. Groen, 2000. "Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 431-438, August.
  • Handle: RePEc:tpr:restat:v:82:y:2000:i:3:p:431-438
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    Cited by:

    1. Finlay Richard & Price Fiona, 2015. "Household saving in Australia," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(2), pages 677-704, July.
    2. Arsić, Milojko & Altiparmakov, Nikola, 2013. "Equity aspects of VAT in emerging European countries: A case study of Serbia," Economic Systems, Elsevier, vol. 37(2), pages 171-186.
    3. Leandro De Magalhães & Raül Santaeulàlia-Llopis, 2015. "The Consumption, Income, and Wealth of the Poorest: Cross-Sectional Facts of Rural and Urban Sub-Saharan Africa for Macroeconomists," Bristol Economics Discussion Papers 15/655, Department of Economics, University of Bristol, UK.
    4. Michael D. Hurd & Susann Rohwedder, 2007. "Economic Well-Being at Older Ages Income- and Consumption-Based Poverty Measures in the HRS," Working Papers WR-410, RAND Corporation.
    5. André Decoster & Jason Loughrey & Cathal O'Donoghue & Dirk Verwerft, 2010. "How regressive are indirect taxes? A microsimulation analysis for five European countries," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 326-350.
    6. Mike Brewer & Cormac O'Dea, 2012. "Measuring living standards with income and consumption: evidence from the UK," IFS Working Papers W12/12, Institute for Fiscal Studies.
    7. Erling Røed Larsen, 2002. "Estimating Latent Total Consumption in a Household," Discussion Papers 324, Statistics Norway, Research Department.
    8. repec:eee:chieco:v:46:y:2017:i:c:p:208-228 is not listed on IDEAS
    9. repec:esx:essedp:736 is not listed on IDEAS
    10. Erling Røed Larsen, 2002. "Consumption Inequality in Norway in the 80s and 90s," Discussion Papers 325, Statistics Norway, Research Department.

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