The Sensitivity of Aggregate Consumption to Human Wealth

The Bank of England Working Paper No. 108

28 Pages Posted: 16 Oct 2000

See all articles by Hasan Bakhshi

Hasan Bakhshi

Bank of England - Monetary Analysis

Date Written: 2000

Abstract

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

Suggested Citation

Bakhshi, Hasan, The Sensitivity of Aggregate Consumption to Human Wealth (2000). The Bank of England Working Paper No. 108, Available at SSRN: https://ssrn.com/abstract=228968 or http://dx.doi.org/10.2139/ssrn.228968

Hasan Bakhshi (Contact Author)

Bank of England - Monetary Analysis ( email )

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United Kingdom
020 7601 5996 (Phone)

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