MILTON FRIEDMAN AND THE EMERGENCE OF THE PERMANENT INCOME HYPOTHESIS

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Milton friedman permanent income hypothesis …

The American developed the permanent income hypothesis (PIH) in his 1957 book . As classical Keynesian consumption theory was unable to explain the constancy of savings rate in the face of rising real incomes in the United States, a number of new theories of consumer behavior emerged. In his book, Friedman posits a theory that encompasses many of the competing hypotheses at the time as special cases and presents statistical evidence in support of his theory.

Milton friedman permanent income hypothesis

19/04/2014 · Friedman permanent income hypothesis ..

In contrast, Marjorie Flavin (1981) finds that consumption is very sensitive to transitory income shocks, a rejection of the PIH. and Matthew Shapiro (1985) however dispute these findings, arguing that Flavin's test specification (which assumes that income is stationary) is biased towards finding excess sensitivity.

Friedman s permanent income hypothesis - …

Friedman’s book on the “Consumption Function” is one of the great works of Economicsdemonstrating how the interplay between theoretical ideas and data analysis could lead tomajor policy implications. We present a short review of Friedman’s Permanent IncomeHypothesis, the origins of the idea and its theoretical foundations. We give a briefoverview of its influence in modern economics and discuss some relevant empiricalresults and the way they relate to the original approach taken by Friedman.

Time-series implications of Friedman's Permanent Income Hypothesis


and Friedman's permanent-income hypothesis

A consumer's permanent income is determined by their assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income. A worker saves only if they expect that their long-term average income, i.e. their permanent income, will be less than their current income.

Friedman's permanent income hypothesis states that ..

Assuming consumers experience diminishing marginal utility, they will want to smooth out consumption over time, e.g. take on debt as a student and also ensure savings for retirement. Coupled with the idea of average lifetime income, the consumption smoothing element of the PIH predicts that transitory changes in income will have only a small effect on consumption. Only longer-lasting changes in income will have a large effect on spending.

Forms and sources of inequality in the United States | …

According to PIH, the distribution of consumption across consecutive periods is the result of an optimizing method by which each consumer tries to maximize his utility. At the same time, whatever ratio of income one devotes to consumption in each period, all these consumption expenditures are allocated in the course of an optimization process—that is, consumer units try to optimize not only across periods but within each period.

Book Review: The Two-Income Trap | Slate Star Codex

The permanent income hypothesis (PIH) is an economic theory attempting to describe how agents spread over their lifetimes. First developed by , it supposes that a person's consumption at a point in time is determined not just by their current but also by their expected income in future years—their "permanent income". In its simplest form, the hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a 's consumption patterns. Its predictions of , where people spread out transitory changes in income over time, departs from the traditional Keynesian emphasis on the . It has had a profound effect on the study of consumer behavior, and provides an explanation for some of the failures of Keynesian demand management techniques.

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More recently, Nicholas Souleles (1999) uses income tax refunds to test the PIH. Since a refund depends on income in the previous year, it is predictable income and should thus not alter consumption in the year of its receipt. The evidence finds that consumption does indeed respond to the income refund, with a between 35–60%. Melvin Stephens (2003) finds that the consumption patterns of recipients in the United States is not well explained by the PIH.