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Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?

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  • John Sabelhaus
  • Jeffrey A. Groen

Abstract

The prediction that consumption-income ratios should decline as income rises in cross-sectional data is a feature of Friedman's (1957) permanent income hypothesis and other consumption-smoothing models. The theory thus provides a link between longitudinal income data and cross-sectional expenditure data: given measured income variability and a functional relationship between consumption and permanent income, we predict cross-sectional expenditure patterns and compare those predictions to actual values. Our approach cannot explain the actual skewness in consumption-income ratios under even the strictest consumption-smoothing model, which implies that income measurement error or other anomalies are affecting the data. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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  • John Sabelhaus & Jeffrey A. Groen, 2000. "Can Permanent-Income Theory Explain Cross-Sectional Consumption Patterns?," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 431-438, August.
    • Handle: RePEc:tpr:restat:v:82:y:2000:i:3:p:431-438
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