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

17 Pages Posted: 4 Jul 2004  

Robert E. Hall

Stanford University - The Hoover Institution on War, Revolution and Peace; 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). NBER Working Paper No. R0015. Available at SSRN: https://ssrn.com/abstract=225080

Robert E. Hall (Contact Author)

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States
650-723-2215 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
650-723-2215 (Phone)

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