Consumption, Uncertainty and Ricardian Equivalence

Part of the Central Issues in Contemporary Economic Theory and Policy book series (CICETP)


The Fisherian intertemporal utility maximization model has proved to be a rich source of hypotheses explaining consumption behavior. Both the Life Cycle Consumption Hypothesis (LCH) (Modigliani and Brumberg [20]; Modigliani et Al. [21]; Modigliani [19]) and the Permanent Income Hypothesis (PIH) (Friedman, [12]) share this heritage. The more recent rational expectations based Random Walk Hypothesis of consumption (RWHC) (Hall [13]) also comes out of this variant. However, there seems to be still another consumption hypothesis lurking in the Fisherian model. This emphasizes the role of uncertainty and makes a distinction between certain — or sure — income and uncertain income, and between certain — or sure — consumption needs and uncertain consumption needs. These distinctions lead to what might be dubbed as the Life Cycle Consumption-Uncertainty Hypothesis (LCC-UH).


Current Income Future Income Wage Income Precautionary Saving Consumption Path 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. [1]
    Barro Robert J.: «Are Government Bonds Net Wealth?» Journal of Political Economy no. 81, 1974, pp. 1095–117.CrossRefGoogle Scholar
  2. [2]
    Barro Robert J.: «The Ricardian Approach to Budget Deficits», Journal of Economic Perspectives no. 3, 1989, pp. 37–54.CrossRefGoogle Scholar
  3. [3]
    Barsky Robert N. — Maniuw GregoryZeldes Stephen P.: «Ricardian Consumers with Keynesian Proposities», American Economic Review no. 76, 1986, pp. 676–91.Google Scholar
  4. [4]
    Bernheim B. Douglas: «A Neoclassical Perspective on Budget Deficits*, Journal of Economic Perspectives, no. 3, 1989, pp. 55–72.CrossRefGoogle Scholar
  5. [5]
    Brown T.M.: «Habit Persistence and Lags in Consumer Behavior», Econometrica no. 20, 1952, pp. 355–71.CrossRefGoogle Scholar
  6. [6]
    Chan Louis K.C.: «Uncertainty and the Neutrality of government Financing Policy», Journal of Monetary Economics no. 11, 1983, pp. 351–72.Google Scholar
  7. [7]
    Dreze Jacques H. — Modigliani Franco: «Consumption Decisions under Uncertainty», Journal of Economic Theory no. 5, 1972, pp. 308–35.Google Scholar
  8. [8]
    Duesenberry James S.: Income. Saving and the Theory of Consumer Behavior, Cambridge, Harvard University Press, 1949.Google Scholar
  9. [9]
    Duncan Greg J. — Morgan James N.: «An Overview of Part I Findings», in Duncan Greg J. — Morgan J.N.. Five thousand American Families, vol. V, Michigan, Ann Arbor, University of Michigan, ISR, 1977.Google Scholar
  10. [10]
    Feldstein Martin: «Government Deficits and Aggregate Demand», Journal of Monetary Economics no. 9, 1982, pp. 1–20.CrossRefGoogle Scholar
  11. [11]
    Flavin Marjorie A.: «The Adjustment of Consumption to Changing Expectation about Future Income», Journal of Political Economy no. 89, 1981, pp. 974–1009.Google Scholar
  12. [12]
    Friedman Milton: A Theory of the Consumption Function, Princeton, Princeton University Press, 1957.Google Scholar
  13. [13]
    Hall Robert E.: “Stochastic Implications of the Life Cycle Permanent Income Hypothesis: Theory and Evidence”. Journal of Political Economy, no. 86, 1978, pp. 971–87.CrossRefGoogle Scholar
  14. [14]
    Hall Robert E. — Mishkin Frederic S.: «The Sensivity of Consumption to Transitory Income: Estimates from Panel Data on Households», Econometrica no. 50, 1982, pp. 461–81.Google Scholar
  15. [15]
    Handa Jagdish: «Risk, Probabilities and a New Theory of Cardinal Utility», Journal of Political Economy no. 85, 1977, pp. 97–122.CrossRefGoogle Scholar
  16. [16]
    Handa Jagdish: «Decisions Under Imperfect Knowledge: The Certainty Equivalence Theory as an Alternative to the Von Neumann — Morgenstern Theory of Uncertainty», Erkenntis no. 20, 1983, pp. 295–328.Google Scholar
  17. [17]
    Kreps L.M.: Lifetime Allocation of Work and Leisure, Durham, Duke University Press, 1971.Google Scholar
  18. [18]
    Leland Hayne E.: «Saving and Uncertainty: The Precautionary Demand for Saving», Quarterly Journal of Economics no. 82, 1968, pp. 465–73Google Scholar
  19. [19]
    Modigliani Franco: «Life Cycle, Individual Thrift and the Wealth of Nations», American Economic Review no. 76, 1986, pp. 297=313.Google Scholar
  20. [20]
    Modigliani FrancoBrumberg Richard: «Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data», in KURIHARA K. (ed): Post-Keynesian Economics, New Brunswick, Rutgers University Press, 1954.Google Scholar
  21. [21]
    Modigliani F. — Ando A.: «The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests», American Economic Review no. 53, 1963, pp. 55–84.Google Scholar
  22. [22]
    Sandmo Agnar: «The Effect of Uncertainty on Saving Decisions», Review of Economic Studies no. 37, 1970, pp. 353–60.CrossRefGoogle Scholar
  23. [23]
    Schoemaker Paul J.H.: «The Expected Utility Model: Its Variants, Purposes Evidence and Limitations», Journal of Economic Literature no. 20, 1982, pp. 529–63.Google Scholar
  24. [24]
    Yaari Menachem E.: «On the Consumer’s Lifetime Allocation Process», International Economic Review no. 5, 1964, pp. 304–17.CrossRefGoogle Scholar
  25. [25]
    Yellen Jane L.: «Symposium on the Budget Deficit», Journal of Economic Perspectives no. 3, 1989, pp. 17–21.CrossRefGoogle Scholar
  26. [26]
    Zeldes Stephen P.: «Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence», Quarterly Journal of Economics no. 103, 1989, pp. 275–98.Google Scholar

Copyright information

© SIPI Srl. Rivista di Politica Economica 1993

Authors and Affiliations

  1. 1.McGill UniversityCanada

Personalised recommendations