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Alan D. Viard - One of the best experts on this subject based on the ideXlab platform.
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the productivity slowdown and the savings shortfall a challenge to the permanent Income Hypothesis
Economic Inquiry, 1993Co-Authors: Alan D. ViardAbstract:The author argues that the savings decline following the post-1973 productivity slowdown discredits the permanent Income Hypothesis. The permanent Income Hypothesis predicts that a reduction in expected future Income growth should cause an increase in saving. The author shows that economic agents revised downward their expectations of future growth after 1973 but that the saving rate declined. Other economic events during this period cannot explain this discrepancy. Copyright 1993 by Oxford University Press.
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THE PRODUCTIVITY SLOWDOWN AND THE SAVINGS SHORTFALL: A CHALLENGE TO THE PERMANENT Income Hypothesis
Economic Inquiry, 1993Co-Authors: Alan D. ViardAbstract:I. INTRODUCTION The permanent Income Hypothesis has been extensively tested over the years. Most of these tests reject the permanent Income Hypothesis at conventional significance levels, but the implied deviations are small in economic terms. In this paper, I argue that the savings shortfall that followed the post-1973 productivity slowdown constitutes a large deviation from the permanent Income Hypothesis. According to the permanent Income Hypothesis, current consumption depends upon preferences, interest rates and expected future Income. In the United States the productivity growth rate sharply declined after 1973 and economic agents forecasted that the lower growth rate would persist. The permanent Income Hypothesis generally predicts that a productivity slowdown, by lowering future expected Income, will stimulate saving. The slower growth rate reduces the ratio of permanent Income to current Income and thereby reduces the ratio of consumption to current Income, unless the intertemporal elasticity of substitution is high. However, the U.S. national saving rate instead fell to a postwar low after the productivity slowdown. The permanent Income Hypothesis, therefore, appears to be inconsistent with recent economic experience. Carroll and Summers |1991, 327-328~ briefly noted that these events pose a challenge to the permanent Income Hypothesis. In this paper, I extend their analysis along four dimensions. First, I calculate the savings response predicted by the permanent Income Hypothesis in an economy with declining returns to capital, abandoning their assumption of a fixed rate of return. Second, I consider the case in which consumers only gradually recognize the extent and duration of the slowdown. Third, I examine published forecasts to demonstrate that the slowdown caused a fall in expected, not merely realized, growth rates, which is necessary for the predicted savings increase. Fourth, I consider the effects of other variables on saving during this period. The paper is organized as follows. In section II, I examine the permanent Income Hypothesis's prediction of the savings response to a productivity slowdown by solving a linearized infinite-horizon specification of the permanent Income Hypothesis in a closed economy with concave production technology. Unless the intertemporal elasticity of substitution is high, the permanent Income Hypothesis predicts rapid capital accumulation in response to the slowdown. In section III, I document the post-1973 decline in productivity growth, the downward revision in economic forecasts and the decline in national saving and capital accumulation. I argue that other recent economic events cannot explain the saving decline and discuss the implications of these events for the permanent Income Hypothesis. I briefly conclude in section IV. II. EFFECTS OF A PRODUCTIVITY SLOWDOWN UNDER THE PERMANENT Income Hypothesis In this section I show that the permanent Income Hypothesis predicts that a productivity slowdown increases saving, unless the intertemporal elasticity of substitution is high. Specification of the Permanent Income Hypothesis I use the model of Ramsey |1928~ and Blanchard and Fischer |1989, 38-47~. There is one good, which can be consumed or costlessly transformed into capital. Labor supply is exogenous, and factors are paid their marginal products. The economy is closed; relaxing this assumption increases the predicted savings effects of a slowdown. The production function for gross output Y is Cobb-Douglas, |Mathematical Expression Omitted~, where K is the capital stock, Z is the level of productivity, L is labor supply and |Alpha~ is a constant between zero and one. I refer to LZ as the amount of effective labor. Gross output grows at rate (2) (d|Y.sub.t~/dt)/|Y.sub.t~=|Alpha~|g.sub.t~+|Alpha~|n.sub.t~ +(1 - |Alpha~)(d|K.sub.t~/dt)/|K.sub.t~, where |g. …
Joseph P Dejuan - One of the best experts on this subject based on the ideXlab platform.
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Testing the cross-section implications of Friedman's permanent Income Hypothesis
Journal of Monetary Economics, 2007Co-Authors: Joseph P Dejuan, John J SeaterAbstract:Abstract We use modern household data and econometric methods to conduct some of the original tests of the permanent Income Hypothesis (PIH) suggested and used by Friedman [1957. A Theory of the Consumption Function. Princeton University Press, Princeton]. The data and methods are superior to those available to Friedman, allowing us to refine Friedman's tests and perform tests he could not do. The results provide overall though not universal support for PIH.
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a simple test of friedman s permanent Income Hypothesis
Economica, 2006Co-Authors: Joseph P Dejuan, John J SeaterAbstract:Friedman’s Permanent Income Hypothesis (PIH) predicts that the Income elasticity of consumption should be higher for households for which a large fraction of the variation of their Income is permanent than for households facing more transitory variations in Income. We test this prediction using modern household data from the US Consumer Expenditure Survey. The results offer some support for the PIH.
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testing the permanent Income Hypothesis new evidence from west german states lander
Social Science Research Network, 2006Co-Authors: Joseph P Dejuan, John J Seater, Tony S. WirjantoAbstract:This paper investigates whether time-series data from 11 West-German states (Lander) provide evidence in accord with the implication of the permanent-Income Hypothesis (PIH) for the stochastic relationship between consumption and Income innovations. The empirical results do not support this Hypothesis, in the sense that the response of consumption to Income innovations is found to be much weaker than is predicted by the PIH. Moreover, for each individual state as well as for Germany as a whole, the response was found to be asymmetric, being stronger for negative than positive Income innovations. This evidence of asymmetry is consistent with a model in which consumers are liquidity constrained.
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A Direct Test of the Permanent Income Hypothesis with an Application to the U.S. States
Social Science Research Network, 2004Co-Authors: Joseph P Dejuan, John J Seater, Tony S. WirjantoAbstract: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 for the PIH across states.
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Testing the Cross-Section Implications of Friedman's Permanent Income Hypothesis
Research Papers in Economics, 2004Co-Authors: Joseph P Dejuan, John J SeaterAbstract:We use modern household data and econometric methods to conduct some of the original tests of the Permanent Income Hypothesis (PIH) suggested and used by Friedman (1957). The data and methods are superior to those available to Friedman, allowing us to refine Friedman’s tests and perform tests he could not do. The results provide overall but not universal support for PIH.
John J Seater - One of the best experts on this subject based on the ideXlab platform.
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Testing the cross-section implications of Friedman's permanent Income Hypothesis
Journal of Monetary Economics, 2007Co-Authors: Joseph P Dejuan, John J SeaterAbstract:Abstract We use modern household data and econometric methods to conduct some of the original tests of the permanent Income Hypothesis (PIH) suggested and used by Friedman [1957. A Theory of the Consumption Function. Princeton University Press, Princeton]. The data and methods are superior to those available to Friedman, allowing us to refine Friedman's tests and perform tests he could not do. The results provide overall though not universal support for PIH.
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a simple test of friedman s permanent Income Hypothesis
Economica, 2006Co-Authors: Joseph P Dejuan, John J SeaterAbstract:Friedman’s Permanent Income Hypothesis (PIH) predicts that the Income elasticity of consumption should be higher for households for which a large fraction of the variation of their Income is permanent than for households facing more transitory variations in Income. We test this prediction using modern household data from the US Consumer Expenditure Survey. The results offer some support for the PIH.
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testing the permanent Income Hypothesis new evidence from west german states lander
Social Science Research Network, 2006Co-Authors: Joseph P Dejuan, John J Seater, Tony S. WirjantoAbstract:This paper investigates whether time-series data from 11 West-German states (Lander) provide evidence in accord with the implication of the permanent-Income Hypothesis (PIH) for the stochastic relationship between consumption and Income innovations. The empirical results do not support this Hypothesis, in the sense that the response of consumption to Income innovations is found to be much weaker than is predicted by the PIH. Moreover, for each individual state as well as for Germany as a whole, the response was found to be asymmetric, being stronger for negative than positive Income innovations. This evidence of asymmetry is consistent with a model in which consumers are liquidity constrained.
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A Direct Test of the Permanent Income Hypothesis with an Application to the U.S. States
Social Science Research Network, 2004Co-Authors: Joseph P Dejuan, John J Seater, Tony S. WirjantoAbstract: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 for the PIH across states.
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Testing the Cross-Section Implications of Friedman's Permanent Income Hypothesis
Research Papers in Economics, 2004Co-Authors: Joseph P Dejuan, John J SeaterAbstract:We use modern household data and econometric methods to conduct some of the original tests of the Permanent Income Hypothesis (PIH) suggested and used by Friedman (1957). The data and methods are superior to those available to Friedman, allowing us to refine Friedman’s tests and perform tests he could not do. The results provide overall but not universal support for PIH.
David Blumenthal - One of the best experts on this subject based on the ideXlab platform.
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Is the target Income Hypothesis an economic heresy
Medical care research and review : MCRR, 1996Co-Authors: John A. Rizzo, David BlumenthalAbstract:This study is the first to relate physician-specific measures of target and actual Income to pricing decisions. We find that a higher ratio of target to actual Income leads to a significant price increase among self-employed, fee-for-service primary care physicians, with an elasticity of approximately 0.3, but not among self-employed primary care physicians who are not paid on a fee-for-service basis. Thus we find evidence of target Income pricing when, as in the case of fee-for-service practices, physicians stand to gain financially from their pricing decisions. Although the target Income Hypothesis (TIH) has been criticized for lacking firm grounding in economic theory, this article argues that the notion of targets has a long history in economic theory and pricing to achieve a target is not new. Moreover, a variety of economic explanations render such behavior consistent with profit maximizing objectives.
Luigi Pistaferri - One of the best experts on this subject based on the ideXlab platform.
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Superior Information, Income Shocks, and the Permanent Income Hypothesis
Review of Economics and Statistics, 2001Co-Authors: Luigi PistaferriAbstract:According to the permanent Income Hypothesis with quadratic preferences, households save for a rainy day the transitory component of Income innovations and consume entirely the permanent one. The m...
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Superior Information, Income Shocks and the Permanent Income Hypothesis
SSRN Electronic Journal, 1999Co-Authors: Luigi PistaferriAbstract:According to the permanent Income Hypothesis with quadratic preferences, savings should react only to transitory Income shocks, but not to permanent shocks. The problem is that Income shock components are not separately observable. I show how the combination of Income realizations with subjective expectations can help to identify separately the transitory and the permanent shock to Income, thus providing a powerful test of the theory. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth.
