Milton Friedman and the Emergence of the Permanent Income Hypothesis

Hsiang-Ke Chao ()
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Hsiang-Ke Chao: University of Amsterdam

No 01-053/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The purpose of this paper is to investigate the evolution of MiltonFriedman's permanent income hypothesis from the 1940s to 1960s, andhow it became the paradigm of modern consumption theory. Modellingunobservables, such as permanent income and permanent consumption, isa long-standing issue in economics and econometrics. While theconventional approach has been to set an empirical model to make"permanent income" measurable, the historical change in the meaningof that theoretical construct is also of methodological interest.This paper will show that the concepts of unobservables, especiallypermanent income, in Friedman's work was fluid and depended on theinstruments used.

Date: 2001-06-13
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