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

John Sabelhaus and Jeffrey A. Groen

The Review of Economics and Statistics, 2000, vol. 82, issue 3, 431-438

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

Date: 2000
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