Consumption Growth Parallels Income Growth: Some New Evidence
This paper argues that the versions of both permanent income and life-cycle theories which have recently become fashionable are inconsistent with the grossest features of cross-country and cross-section data on consumption and income. There is clear evidence that consumption and income growth are much more closely linked than would be predicted by these theories. it appears that consumption smoothing takes place over periods of several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income component is not to be regarded as expected lifetime earnings... It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness." They call into question the usefulness of standard representative Consumer approaches to the analysis of saving behavior. And they call for increased emphasis on liquidity constraints and short run precautionary saving as determinants of consumption behavior.
|Date of creation:||Sep 1989|
|Date of revision:|
|Publication status:||published as National Saving and Economic Performance, eds. B. Douglas Bernheimand and John Shoven. Chicago: The University of Chicago Press, 1991. pp305-343.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
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.:
- Gilbert Ghez, 1975. "Education, the Price of Time, and Life-Cycle Consumption," NBER Chapters, in: Education, Income, and Human Behavior, pages 295-312 National Bureau of Economic Research, Inc.
- Deaton, A., 1989. "Saving in Developing Contries: Theory and Review," Papers 144, Princeton, Woodrow Wilson School - Development Studies.
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Robert J. Barro, 1991.
"A Cross-Country Study of Growth, Saving, and Government,"
in: National Saving and Economic Performance, pages 271-304
National Bureau of Economic Research, Inc.
- Robert J. Barro, 1989. "A Cross-Country Study of Growth, Saving, and Government," NBER Working Papers 2855, National Bureau of Economic Research, Inc.
- J. Bradford De Long & Lawrence H. Summers, 1985.
"Is Increased Price Flexibility Stabilizing?,"
NBER Working Papers
1686, National Bureau of Economic Research, Inc.
- John Y. Campbell & N. Gregory Mankiw, 1989.
"Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence,"
in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246
National Bureau of Economic Research, Inc.
- John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
- Paul M Romer, 1999.
"Increasing Returns and Long-Run Growth,"
Levine's Working Paper Archive
2232, David K. Levine.
- Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
- 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 971-87, December.
- Kotlikoff, Laurence J & Summers, Lawrence H, 1981.
"The Role of Intergenerational Transfers in Aggregate Capital Accumulation,"
Journal of Political Economy,
University of Chicago Press, vol. 89(4), pages 706-32, August.
- Laurence J. Kotlikoff & Lawrence H. Summers, 1980. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc.
- repec:fth:harver:1435 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3090. 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: ()
If references are entirely missing, you can add them using this form.