Measuring Deviations from the Permanent Income Hypothesis

Abstract

This paper examines the permanent income hypothesis by measuring the extent to which consumption deviates from it. Measuring deviations enables us to interpret empirical results in terms of economic significance as opposed to statistical significance. Namely, the author examines whether the permanent income hypothesis is a reasonable model rather than whether it is exactly correctly specified. This paper finds that postwar U.S. consumption deviates from the permanent income hypothesis by less than 4 percent, which indicates a reasonably good fit when viewed in a representative agent framework with so many restrictive assumptions. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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