Was the increase in income inequality in the US due to permanent shocks or merely to an increase in the variance of transitory shocks? The implications for consumption and welfare depend crucially on the answer to this question. We use CEX repeated cross-section data on consumption and income to...

This paper tests the prediction of the Permanent Income Hypothesis (PIH) that news about future income induce a revision in consumption equal to the revision in permanent income. We use time-series data from 48 contiguous US states to perform the test. The empirical results provide some support...

This paper investigates whether there are variants of the permanent income model that are consistent with seasonally unadjusted quarterly postwar Canadian data. The analysis is based on a misspecification-test equation which nests the standard permanent income model. The results obtaineda re...

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...

We show how tax kinks can be used to estimate the marginal propensity to consume (MPC). Tax kinks create discrete changes in the relationship between taxable income and disposable income, which - under a set of testable assumptions - enables causal identification of the spending response to...

In this paper we consider three alternative approaches to test the Permanent Income Hypothesis (PIH) in the context of dynamic panels: the aggregate consumption approach, the Euler equation approach and Þnally Friedman (1957)'s original characteristic tests. Our empirical evidence, using the...

Modern consumer theories are built upon the premise of the forward looking behavior of households. While most of the empirical studies at micro level are based on Euler equation, there have been few to estimate the household consumption function and test the implication of forward looking...