IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Is consumption insufficiently sensitive to innovations in income?

  • Lawrence J. Christiano

Deaton (1986) has noted that if income is a first-order autoregressive process in first differences, then a simple version of Friedman’s permanent income hypothesis (SPIH) implies that measured U.S. consumption is insufficiently sensitive to innovations in income. This paper argues that this implication of the SPIH is a consequence of the fact that it ignores the role of the substitution effect in the consumption decision. Using a parametric version of the standard model of economic growth, the paper shows that very small movements in interest rates are sufficient to induce an empirically plausible amount of consumption smoothing. Since an overall evaluation of the model’s explanation for the observed smoothness of consumption requires examining its implications for other aspects of the data, the paper also explores some of these.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

File URL:
Download Restriction: no

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 106.

in new window

Date of creation: 1987
Date of revision:
Handle: RePEc:fip:fedmsr:106
Contact details of provider: Postal: 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN 55480-0291
Phone: (612) 204-5000
Web page:

More information through EDIRC

Order Information: Web: Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedmsr:106. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Janelle Ruswick)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.