Permanent Income Hypothesis, Myopia and Liquidity Constraints: A Case Study of Pakistan

Khalid Khan, Hazrat Yousaf, Muhammed Ghazanfar Abbas, Manzoor Memon and Mohammed Nishat

Asian Economic and Financial Review, 2012, vol. 2, issue 1, 155-162

Abstract: This paper is an attempt to test the Permanent Income Hypothesis (PIH), Myopia and Liquidity Constraints as a case study for Pakistan. The paper also attempts to find out valid reasoning incase the PIH is rejected. Hall‟s random walk model (1978) and Campbell and Mankiw model (1990) are used to test for the validity of PIH. The results reject the PIH and indicate the strong validity of Absolute Income Hypothesis (AIH) in Pakistan. Accordingly, Shea (1995) model is also used to validate the rejection of the PIH. The application of Shea (1995) model confirms the rejection; the symmetric relationship between consumption and expected income and provide a little evidence of existence of liquidity constraints

Keywords: Permanent Income Hypothesis; Absolute Income Hypothesis; Symmetric Relationship; Liquidity Constraints (search for similar items in EconPapers)
Date: 2012
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