No. 166 - The Microeconomics and Macroeconomics of the Permanent Income Hypothesis

by Angus Deaton
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Much of the literature on consumption is concerned with the interpretation of the aggregate data directly in terms of the permanent income hypothesis as derived for a single individual or household. So considered, the permanent income hypothesis is typically rejected. In this paper, I look at the microeconomic evidence, to see whether the theory fares better there, and whether we might not be able to make progress in understanding the macroeconimics of consumption and saving by working from the bottom up. The literature to date has typically found it much more difficult to reject the permanent income hypothesis on micro data, and those tests that have encountered negative results can typically be "explained" by econometric or data problems. Furthermore, it is possible to construct realistic models where the permanent income hypothesis is true for each agent, but where the model appears to fail in the aggregate, much as it does in the actual data.

This paper was presented at the Workshop on "Savings in Italy: Past and Future Trends, Household and Government Behaviour", organized by the Bank of Italy and held in Rome on 16-17 January 1992. It is a self-contained version of Chapter 5, "Macroeconomics and Microeconomics" of the forthcoming book Understanding Consumption.

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  1. 31 March 1992
    No. 166 - The Microeconomics and Macroeconomics of the Permanent Income Hypothesis
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