Abstract
The permanent income hypothesis (PIH) is a theory that links an individual’s consumption at any point in time to that individual’s total income earned over his or her lifetime. The hypothesis is based on two simple premises: (1) that individuals wish to equate their expected marginal utility of consumption across time and (2) that individuals are able to respond to income changes by saving and dis-saving. In this article we present the intuition and empirical implications of the PIH in several standard contexts.
Keywords
- Buffer stocks
- Consumption insurance
- Euler equations
- Impatience
- Liquidity constraints
- Marginal utility of consumption
- Martingales
- Permanent income hypothesis
- Precautionary wealth
- Preferences
- Retirement
- Retirement consumption puzzle
- Uncertainty
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Aguiar, M., Hurst, E. (2018). Permanent-Income Hypothesis. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2801
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2801
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