permanent income hypothesis
E96715
The permanent income hypothesis is an economic theory, associated with Milton Friedman and the Chicago School, which posits that individuals base their consumption decisions on expected long-term average income rather than current income.
Statements (49)
| Predicate | Object |
|---|---|
| instanceOf |
consumption theory
→
economic theory → macroeconomic concept → |
| associatedWith | Chicago School of Economics NERFINISHED → |
| assumes |
access to credit or saving instruments
→
intertemporal optimization of consumption → rational expectations in some formulations → |
| contrastsWith | current income hypothesis → |
| coreIdea |
consumers are forward-looking
→
consumers form expectations about future income → consumption depends more on permanent income than on current income → consumption depends on expected long-term average income → individuals smooth consumption over time → permanent income changes have large effects on consumption → saving is used to smooth consumption over the life cycle → temporary income changes have small effects on consumption → |
| criticizedFor |
assuming high degree of consumer rationality
→
assuming no liquidity constraints → assuming perfect capital markets → limited ability to explain excess sensitivity of consumption to income → limited ability to explain excess smoothness of consumption → |
| developedIn | United States NERFINISHED → |
| empiricalTest |
consumption response to lottery winnings
→
consumption response to social security changes → consumption response to temporary tax rebates → |
| field |
consumption economics
→
macroeconomics → microeconomics → |
| implies |
marginal propensity to consume out of permanent income is high
→
marginal propensity to consume out of transitory income is low → predictable income changes should not systematically change consumption → |
| influenced |
New Classical macroeconomics
→
modern consumption function modeling → rational expectations permanent income models → real business cycle theory → |
| influencedBy | Fisherian intertemporal choice theory → |
| mathematicalFormulation | consumption equals a constant fraction of permanent income → |
| proposedBy | Milton Friedman → |
| publication | A Theory of the Consumption Function → |
| publicationYear | 1957 → |
| relatedConcept |
Euler equation for consumption
→
intertemporal budget constraint → |
| relatedTo | life-cycle hypothesis → |
| timePeriod | mid-20th century → |
| usedIn |
analysis of tax policy effects on consumption
→
forecasting consumption → macroeconomic policy analysis → |
| usesConcept |
permanent income
→
transitory income → |
Referenced by (1)
Full triples — surface form annotated when it differs from this entity's canonical label.