The sensitivity of aggregate consumption to human wealth

Hasan Bakhshi

Bank of England working papers from Bank of England

Abstract: The Permanent Income Hypothesis (PIH) assumes that individuals base their decisions on lifetime wealth, not current income. Textbook versions of the PIH predict that the elasticity of consumption with respect to human wealth is equal to the share of human wealth in total wealth. Comparing calibrated wealth shares with econometrically estimated elasticities amounts to a simple test of the PIH. In the United Kingdom, aggregate consumption is found to be more sensitive to changes in human wealth than is predicted by the PIH. This does not appear to be explained by a simple, but common, treatment of credit constraints.

Date: 2000-01
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:108

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