Permanent Income Hypothesis, Myopia and Liquidity Constraints: A Case Study of Pakistan

Hazrat Yousaf · Muhammed Ghazanfar Abbas · Manzoor Hussain Memon · Mohammed Nishat

15 citations0/0 files storedPakistan Journal of Social Sciences

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Monetary Policy and Economic Impact Financial Literacy, Pension, Retirement Analysis Economic theories and models

Abstract

In this paper, it is attempted to test the permanent income hypothesis(PIH) for Pakistan. If the PIH is not valid for Pakistan the study alsoattempts to find out the reasons for rejection of PIH. Hall’s randomwalk model (1978) and Campbell and Mankiw model (1990) are usedto test for the validity of PIH. The results of this study indicate thestrong validity of absolute income hypothesis (AIH) rather than PIH.Therefore, to find out the reasons for the rejection of the PIH inPakistan we used Shea (1995) model. The results of the Shea (1995)model rejected the symmetric relationship between consumption andexpected income and provide a little evidence of existence of liquidityconstraints.

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References

1976Econometric policy evaluation: A critique 1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 1989Consumption and Liquidity Constraints: An Empirical Investigation 1981The Adjustment of Consumption to Changing Expectations About Future Income 1958A Theory of the Consumption Function 1990Permanent Income, Current Income, and Consumption 1982The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables 1989Consumption and Capital Market Imperfections: An International Comparison

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