Household Production and the Excess Sensitivity of Consumption to Current Income

61 Pages Posted: 9 Jul 1999 Last revised: 5 May 2000

See all articles by Marianne Baxter

Marianne Baxter

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: March 1999

Abstract

Empirical research on the permanent income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium version of Becker's (1965) model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth.

Suggested Citation

Baxter, Marianne and Jermann, Urban J., Household Production and the Excess Sensitivity of Consumption to Current Income (March 1999). NBER Working Paper No. w7046, Available at SSRN: https://ssrn.com/abstract=157595

Marianne Baxter (Contact Author)

Boston University - Department of Economics ( email )

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Urban J. Jermann

University of Pennsylvania - Finance Department ( email )

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