Reconciling Consumer Confidence and Permanent Income Consumption

K. H. McIntyre ()
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K. H. McIntyre: McDaniel College

Eastern Economic Journal, 2007, vol. 33, issue 2, pages 257-275

Abstract: The forecasting power of consumer confidence indexes for consumption spending runs counter to the predictions of the permanent income hypothesis (PIH). This paper resolves this discrepancy by developing a “confidence augmented” permanent income hypothesis (CAPIH). While it does not radically alter the estimated extent of permanent income consumption, the CAPIH model predicts a significantly smaller intertemporal elasticity of substitution than a standard PIH model. In addition, the results are largely invariant to the measure of consumer confidence used and the choice of instrumental variables.

Date: 2007
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