Consumption Growth Parallels Income Growth: Some New Evidence

Christopher Carroll and Lawrence Summers

No 3090, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues that the versions of both permanent income and life-cycle theories which have recently become fashionable are inconsistent with the grossest features of cross-country and cross-section data on consumption and income. There is clear evidence that consumption and income growth are much more closely linked than would be predicted by these theories. it appears that consumption smoothing takes place over periods of several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income component is not to be regarded as expected lifetime earnings... It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness." They call into question the usefulness of standard representative Consumer approaches to the analysis of saving behavior. And they call for increased emphasis on liquidity constraints and short run precautionary saving as determinants of consumption behavior.

Date: 1989-09
Note: EFG ME
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Published as National Saving and Economic Performance, eds. B. Douglas Bernheimand and John Shoven. Chicago: The University of Chicago Press, 1991. pp305-343.
Published as Consumption Growth Parallels Income Growth: Some New Evidence , Christopher D. Carroll, Lawrence H. Summers. in National Saving and Economic Performance , Bernheim and Shoven. 1991

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