Stimulus and the Permanent Income Hypothesis

11 Pages Posted: 22 Feb 2021

See all articles by Eugene F. Fama

Eugene F. Fama

University of Chicago - Finance

Date Written: February 19, 2021


Government stimulus programs that transfer resources to citizens are meant to spur consumption. I examine the effects of stimulus through the lens of the permanent income (PI) hypothesis. The PI model predicts that a temporary increase in income due to stimulus leads to a small increase in current consumption because recipients save most of the stimulus payment to spread it over consumption for many future periods. This prediction performs well during the end-of-sample pandemic recession of 2020 and the financial crisis recession of 2008-2009, which are the two major recessions of 1959-2020 that lead to substantial temporary stimulus.

Suggested Citation

Fama, Eugene F., Stimulus and the Permanent Income Hypothesis (February 19, 2021). Chicago Booth Research Paper No. 21-08, Fama-Miller Working Paper, Available at SSRN: or

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

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