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The sensitivity of aggregate consumption to human wealth

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  • Hasan Bakhshi

Abstract

The Permanent Income Hypothesis (PIH) assumes that individuals base their decisions on lifetime wealth, not current income. Textbook versions of the PIH predict that the elasticity of consumption with respect to human wealth is equal to the share of human wealth in total wealth. Comparing calibrated wealth shares with econometrically estimated elasticities amounts to a simple test of the PIH. In the United Kingdom, aggregate consumption is found to be more sensitive to changes in human wealth than is predicted by the PIH. This does not appear to be explained by a simple, but common, treatment of credit constraints.

Suggested Citation

  • Hasan Bakhshi, 2000. "The sensitivity of aggregate consumption to human wealth," Bank of England working papers 108, Bank of England.
    • Handle: RePEc:boe:boeewp:108
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp108.pdf
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    References listed on IDEAS

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    Cited by:

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    3. Ryan Banerjee & Nicoletta Batini, 2003. "UK Consumers’ Habits," Discussion Papers 13, Monetary Policy Committee Unit, Bank of England.

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