The sensitivity of aggregate consumption to human wealth

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 27 January 2000

Working Paper no. 108
By Hasan Bakhshi

The Permanent Income Hypothesis (PIH) assumes that individuals base their decisions on lifetime wealth, not current income. Textbook versions of the PIH predict that the elasticity of consumption with respect to human wealth is equal to the share of human wealth in total wealth. Comparing calibrated wealth shares with econometrically estimated elasticities amounts to a simple test of the PIH. In the United Kingdom, aggregate consumption is found to be more sensitive to changes in human wealth than is predicted by the PIH. This does not appear to be explained by a simple, but common, treatment of credit constraints.

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