Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence
Robert E. Hall
Stanford University - The Hoover Institution on War, Revolution and Peace; National Bureau of Economic Research (NBER)
NBER Working Paper No. R0015
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.
Number of Pages in PDF File: 17
Date posted: July 4, 2004