The Sensitivity of Aggregate Consumption to Human Wealth
The Bank of England Working Paper No. 108
28 Pages Posted: 16 Oct 2000
Date Written: 2000
The Permanent Income Hypothesis (PIH) assumes that individuals base their decisions on lifetime wealth, not current income. Textbook versions of the PIH predict that the elasticity of consumption with respect to human wealth is equal to the share of human wealth in total wealth. Comparing calibrated wealth shares with econometrically estimated elasticities amounts to a simple test of the PIH. In the United Kingdom, aggregate consumption is found to be more sensitive to changes in human wealth than is predicted by the PIH. This does not appear to be explained by a simple, but common, treatment of credit constraints.
JEL Classification: E21
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