Household Production and the Excess Sensitivity of Consumption to Current Income
Marianne Baxter () and
Urban Jermann ()
No 7046, NBER Working Papers from National Bureau of Economic Research, Inc
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 version of Becker's (1965) 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 E10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-dge, nep-lab and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (80) Track citations by RSS feed
Published as American Economic Review, Vol. 89, no. 5 (September 1999): 902-920.
Downloads: (external link)
Journal Article: Household Production and the Excess Sensitivity of Consumption to Current Income (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:7046
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().