Household Production and the Excess Sensitivity of Consumption to Current Income
- 1 September 1999
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 89 (4) , 902-920
- https://doi.org/10.1257/aer.89.4.902
Abstract
Empirical research on the permanent-income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent-income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth.Keywords
This publication has 19 references indexed in Scilit:
- The Response of Household Consumption to Income Tax RefundsAmerican Economic Review, 1999
- Instrument Relevance in Multivariate Linear Models: A Simple MeasureThe Review of Economics and Statistics, 1997
- Are Consumer Durables Important for Business Cycles?The Review of Economics and Statistics, 1996
- Estimating substitution elasticities in household production modelsEconomic Theory, 1995
- The Allocation of Capital and Time over the Business CycleJournal of Political Economy, 1991
- The Permanent Income Hypothesis RevisitedEconometrica, 1991
- Estimating Models with Intertemporal Substitution Using Aggregate Time Series DataJournal of Business & Economic Statistics, 1990
- Consumer Durables and the Real Interest RateThe Review of Economics and Statistics, 1985
- The Adjustment of Consumption to Changing Expectations About Future IncomeJournal of Political Economy, 1981
- Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and EvidenceJournal of Political Economy, 1978