Type

Report

Authors

Jeremy Rudd
Michael Palumbo
Karl Whelan

Subjects

Economics

Topics
goods and services budget permanent income theory consumption deflation finance real income relationships permanent income hypothesis

On the relationships between real consumption, income, and wealth (2002)

Abstract The existence of durable goods implies that the welfare flow from consumption cannot be directly associated with total consumption expenditures. As a result, tests of standard theories of consumption (such as the Permanent Income Hypothesis, or PIH) typically focus on nondurable goods and services. Specifically, these studies generally relate real consumption of nondurable goods and services to measures of real income and wealth, where the latter are deflated by a price index for total consumption expenditures. This paper demonstrates that this procedure is only valid under the assumption that real consumption of nondurables and services is a constant multiple of aggregate real consumption outlays - an assumption that represents a very poor description of U.S. data. The paper develops an alternative approach that is based on the observation that the ratio of these series has historically been stable in nominal terms, and uses this approach to examine two basic predictions of the PIH. We obtain significantly different results relative to the traditional approach.
Collections Ireland -> University College Dublin -> School of Economics
Ireland -> University College Dublin -> College of Social Sciences and Law
Ireland -> University College Dublin -> Economics Research Collection

Full list of authors on original publication

Jeremy Rudd, Michael Palumbo, Karl Whelan

Experts in our system

1
Karl Whelan
University College Dublin
Total Publications: 70