Household Production and the Excess Sensitivity of Consumption to Current Income

Urban Jermann and Marianne Baxter ()

American Economic Review, 1999, vol. 89, issue 4, 902-920

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.

JEL-codes: D13 E21 (search for similar items in EconPapers)
Date: 1999
Note: DOI: 10.1257/aer.89.4.902
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Citations: View citations in EconPapers (130)

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