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The Effect of the Temporary and Permanent Income Shock to Household’s Consumption in Iran Using Blanchard-Quah Method

Mohammad Mowlaei () and Oday Ali ()
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Mohammad Mowlaei: Assistant Professor of Economics, Bu-Ali Sina University
Oday Ali: PhD Candidate in Economics, Bu-Ali Sina University

Quarterly Journal of Applied Theories of Economics, 2016, vol. 3, issue 3, pages 93-114

Abstract: Temporary and permanent income shocks are the most important determinants of household’s consumption. According to Friedman's permanent income hypothesis, household consumption always responds to permanent income shock more than temporary shocks. Given that these two components shock separately are unobservable, in this paper we use Blanchard-Quah method to decompose the income shocks into temporary and permanent and then by applying Structural Vector Auto-regression model to identify the effect of that two shock components on household’s consumption in Iran during the 1974-2014 years. The results from the estimated model confirm the validity of the PIH in Iran. So that household consumption almost entirely explained by permanent shocks income. But it does not show sensitivity to temporary shocks.

Keywords: Temporary and permanent income shocks; Household consumption; Blanchard-Quah method; SVAR models. (search for similar items in EconPapers)
JEL-codes: C32 D11 E21 (search for similar items in EconPapers)
Date: 2016
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