Can Permanent Income Theory Explain Cross-Section Consumption Patterns?
Jeffrey A. Groen, John Sabelhaus ,
3
( 82 )
Review of Economics and Statistics
431-438
August
2000
Abstract

The prediction that consumption-income ratios should decline as income rises in cross-sectional data is a feature of Friedman's (1957) permanent income hypothesis and other consumption-smoothing models. The theory thus provides a link between longitudinal income data and cross-sectional expenditure data: given measured income variability and a functional relationship between consumption and permanent income, we predict cross-sectional expenditure patterns and compare those predictions to actual values.

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