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New Result in Theory of Consumption: Changes in Savings and Income Growth

  • Cheng K. Wu

    (Fintech Research Associates)

Registered author(s):

Hall (1978) theorized that future consumption could be written only as a function of its current consumption. Since this result is known to be wrong in data, we reexamine, from Flavin's original equations (1981), how they may have reached this conclusion. In the Appendix, we derive a generic permanent income equation and discuss Flavin's imprecision. Furthermore, by replacing one of Flavin's three basic equations and adding the definition of savings, we find that changes in savings should also be a function of labor income growth, a solution anticipated by Modigliani and Brumberg (1952, published 1979).

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Paper provided by EconWPA in its series Macroeconomics with number 9706007.

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Length: 13 pages
Date of creation: 23 Jun 1997
Date of revision:
Handle: RePEc:wpa:wuwpma:9706007
Note: Type of Document - Word Perfect 6.0 DOS; prepared on IBM PC; to print on HP Laserjet 4; pages: 13 . In case you need, I have Flavin's two comments
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  1. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  2. Robert N. McCauley & Steven A. Zimmer, 1989. "Explaining international differences in the cost of capital," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 7-28.
  3. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  5. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
  6. Hooper, P. & Mann, C.L., 1989. "The Emergence And Persistence Of The U.S. External Imbalance, 1980-87," Princeton Studies in International Economics 65, International Economics Section, Departement of Economics Princeton University,.
  7. Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Working Papers 2118, National Bureau of Economic Research, Inc.
  8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  9. 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.
  10. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  11. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers 728, Queen's University, Department of Economics.
  12. John Campbell & Angus Deaton, 1989. "Why is Consumption So Smooth?," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 357-373.
  13. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  14. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  15. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
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  17. Modigliani, Franco, 1988. "The Role of Intergenerational Transfers and Life Cycle Saving in the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 15-40, Spring.
  18. 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.
  19. repec:fth:harver:1435 is not listed on IDEAS
  20. Thomas J. Sargent, 1977. "Rational expectations, econometric exogeneity and consumption," Staff Report 25, Federal Reserve Bank of Minneapolis.
  21. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
  22. Evan F. Koenig, 1990. "Real Money Balances and the Timing of Consumption: An Empirical Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 399-425.
  23. A. Steven Englander & Charles Steindel, 1989. "Evaluating recent trends in capital formation," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 7-19.
  24. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  25. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  26. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
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