Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence

17 Pages Posted: 4 Jul 2004

See all articles by Robert E. Hall

Robert E. Hall

Hoover Institution and Department of Economics, Stanford University; National Bureau of Economic Research (NBER)

Date Written: April 1979

Abstract

Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle-permanent income hypothesis.

Suggested Citation

Hall, Robert E., Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence (April 1979). Available at SSRN: https://ssrn.com/abstract=225080

Robert E. Hall (Contact Author)

Hoover Institution and Department of Economics, Stanford University ( email )

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