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We estimate the path of aggregate consumption implied by the permanent income hypothesis by allowing for parameter variation dictated by the theory. Our evidence, obtained by applying the Kalman filter to U.S. data for 1929-2001, supports the proposed generalisation and the fluctuations in the parameter estimates comply with a priori theoretical expectations. [ABSTRACT FROM AUTHOR]

This paper investigates whether time-series data from 11 West-German states (Länder) provide evidence in accord with the implication of the permanent-income hypothesis (PIH) for the stochastic relationship between consumption and income innovations. The empirical results do not support this hypothesis, in the sense that the response of consumption to income innovations is found to be much weaker than is predicted by the PIH. Moreover, for each individual state as well as for Germany as a whole, the response was found to be asymmetric, being stronger for negative than positive income innovations. This evidence of asymmetry is consistent with a model in which consumers are liquidity constrained. [ABSTRACT FROM AUTHOR]

This article examines the consumption response to monthly paycheque receipt. Since the amount and arrival date of paycheques are known in advance, the receipt of a paycheque does not coincide with the receipt of new information. Under the basic rational expectations Life-Cycle/Permanent Income Hypothesis, household consumption should not respond to paycheque arrival. Using data from the UK's Family Expenditure Survey, this article finds that household consumption is excessively sensitive to paycheque receipt. The results cannot be explained by any underlying monthly expenditure fluctuations common to all households. The presence of liquidity constraints as measured by wealth and age can account for the excess sensitivity results. [ABSTRACT FROM AUTHOR]

All income increases a person's absolute wealth, but consumption decisions may be based more heavily on perceived changes in wealth. Change is computed by comparing a current state with a former state, and we predicted that people would be more likely to spend income framed as a gain from a current wealth state than income framed as a return to a prior state. Four experiments confirmed this prediction on people's memory for spending of a government tax rebate (Experiment 1), on unobtrusive self-report measures of spending an unexpected windfall (Experiments 2 and 3), and on actual spending on items for sale in a laboratory experiment (Experiment 4). These results can be explained, at least in part, by the reference points implied in the framing of income (follow-ups to Experiments 1 and 4). Discussion focuses on implications for the consumption of other commodities, assessments of risk, and government tax policies. Copyright © 2006 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

Friedman's Permanent Income Hypothesis (PIH) predicts that the income elasticity of consumption should be higher for households for which a large fraction of the variation of their income is permanent than for households facing more transitory variations in income. We test this prediction using modern household data from the US Consumer Expenditure Survey. The results offer some support for the PIH. [ABSTRACT FROM AUTHOR]

Although many studies have found that unemployment has a negative effect on housing prices, the explanation put forward for this effect, that is, uncertainty over the ability to repay long-term mortgage loans, has not been empirically tested. This paper attempts to empirically test this explanation using a cross-city analysis. Singapore and Hong Kong have been chosen because they are both compact cities and are similar in many aspects. The exception is that Singapore has an established system of home financing from the Central Provident Fund, thereby enhancing greater certainty over the ability to repay long-term mortgage loans. Macro-economic factors, including unemployment rate, were analysed from 1993Q1 to 2003Q4 for Singapore and from 1985Q1 to 2000Q4 for Hong Kong. The results show that, unlike Hong Kong, Singapore's rate of unemployment has no statistical significant effect on housing prices. This study has confirmed the financial constraints hypothesis in the permanent income hypothesis study. [ABSTRACT FROM AUTHOR]

As income mobility over time serves to offset income inequality existing at any point in time, cross-national differences in social stratification are preferably assessed from data on average incomes over an extended period of time. Hence, this article uses longitudinal income data from the Panel Study of Income Dynamics and the European Community Household Panel to reassess the received empirical evidence. Even discounting the impact of income mobility, however the United States continues to exhibit the highest level of permanent income inequality in this particular sample of industrial countries. In addition, older workers and individuals at the bottom of the income distribution have faced significantly worse income prospects than common in many European countries. [ABSTRACT FROM AUTHOR]

In this paper, we describe the properties of the optimal allocation of consumption in a world with moral hazard and hidden borrowing and lending. We discuss how and under what conditions the efficient allocation can be distinguished from that of the permanent income (self-insurance) model. We also compare our allocation with the complete markets (full information) case, and with the standard moral hazard model with monitorable and fully contractible asset holdings. [ABSTRACT FROM AUTHOR]

Hall (1978) has stimulated considerable controversy and empirical work on testing the validity of the permanent income hypothesis (PIH). Much of this work is on the developed countries. In the developing countries per capita incomes show larger fluctuations and for the majority, opportunities for intertemporal substitution are limited. This paper uses the extended framework of Campbell and Mankiw (1989) and finds that current consumption is determined by current income for more than two thirds of the consumers in Fiji. [ABSTRACT FROM AUTHOR]

This article develops a method for testing the risk-sharing hypothesis (RSH) against various versions of the permanent income hypothesis (PIH) while allowing for heterogeneity in risk preferences across households. Using 1-year and longer differences in household total nondurable consumption data from Indian villages, we find evidence that favors the RSH over the PIH at the village level. [ABSTRACT FROM AUTHOR]

A model integrating eh permanent income and relative income hypotheses was employed to explain consumer expenditure behavior in the U.S. The model was empirically tested using data from the interview survey portion of the 1996 and 1997 Consumer Expenditure Survey. The results indicate that household expenditure behavior is generally explained by both hypotheses when integrated in one model. [ABSTRACT FROM AUTHOR]

In this paper, we extend the well-known Sims, Stock and Watson (SSW) ( ; Econometrica 56, 113–44), analysis on estimation and testing in vector autoregressive process (VARs) with integer unit roots and deterministic components to a more general set-up where non-stationary fractionally integrated (NFI) processes are considered. In particular, we focus on partial VAR models where the conditioning variables are NFI since this is the only finite-lag VAR model compatible with such processes. We show how SSW's conclusions remain valid. This means that whenever a block of coefficients in the partial VAR can be written as coefficients on zero-mean I(0) regressors in models including a constant term, they will have a joint asymptotic normal distribution. Monte Carlo simulations and an empirical application of our theoretical results are also provided. [ABSTRACT FROM AUTHOR]

Presents a study which examined the permanent-income hypothesis (PIH) in a heterogeneous-agents general-equilibrium incomplete markets model (Brewley model). Background on PIH; Assumptions in justifying PIH in an intertemporal optimization framework; Characteristics of Brewley model.

This article illustrates the changing concept of permanent income and the corresponding stages in economist Milton Friedman's work on the permanent income hypothesis from the 1940s to the 1960s. It also deals with the relationship between the theoretical concepts, modeling procedures, and different empirical evaluation methods and problems there encountered. It addresses two empirical problems: measurement and testing. Economist John R. Hicks regards as good tools models that improve the measurability of economic entities, but Friedman is more concerned with testing models. The conventional view on testing in economics is that tests always confirm or disconfirm the target theory or model. Friedman's case on the permanent income hypothesis can be said to present an alternative idea of testing, namely the characteristics tests, meaning that only certain features of models are subject to testing. Whether models are instruments for measuring or testing the permanent income hypothesis, they interact with the meaning of permanent income in different ways.

A central implication of the life-cycle/permanent-income hypothesis (LC/PIH) is that consumers should not respond to predictable changes in their income. This paper adds to the evidence by exploiting a natural experiment provided by annual payments from the state of Alaska's Permanent Fund to every resident in the state of Alaska that should yield an unusually powerful test of the LC/PIH. The author found no evidence that the consumption of Alaskan households reacts to these payments. However, although households in Alaska do not overreact to payments from the Permanent Fund, the author finds that the consumption of the very same households is excessively sensitive to their income tax refunds. The next section of the paper presents details on the operation of the Alaska Permanent Fund and discusses the relative advantages of using the payments from the Permanent Fund to test the LC/PIH. Section II contains a brief description of the data. Section III presents the main excess sensitivity tests. Section IV discusses alternative explanations for the finding that households in Alaska appear to smooth their payments from the Alaska Permanent Fund, and Section V concludes.

In 1992 the Czech Republic privatized state assets, which resulted in some citizens receiving an unexpected windfall. Whether the windfall was consumed or saved provides a clear test of the permanent income hypothesis in a transitional economy. Analysis of data from a survey conducted specifically to test this hypothesis indicates that only a small number of transferred assets were consumed, a finding which is consistent with the permanent income hypothesis. JEL classification: D31, E21, H24. [ABSTRACT FROM AUTHOR]

Even though the permanent income and relative income hypotheses have been introduced in past research to explain consumer behaviour, no previous attempt was undertaken to integrate them in one model. In this article, the hypotheses were synthesized into a single model. The model was empirically tested using data from the 1996 Canadian Family Expenditure Survey. The results indicate that household consumption behaviour is generally explained by both hypotheses when integrated into one model, contrary to previously treating them as mutually exclusive hypotheses. [ABSTRACT FROM AUTHOR]

According to the permanent income hypothesis with quadratic preferences, households save for a rainy day the transitory component of income innovations and consume entirely the permanent one. The model also rules out precautionary saving. Typically, income shock components are not separately observable, and information on the conditional variance of income is hard to come by. We show how to combine income realizations with subjective expectations to identify separately the transitory and the permanent shock to income and to obtain a measure of idiosyncratic uncertainty, thus providing a powerful test of the theory in short panels. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth. [ABSTRACT FROM AUTHOR]

This paper addresses the viability of the permanent income- life cycle hypothesis in a monetary economy in which money enters the utility function of infinitely lived agents. Two forms of the hypothesis are distinguished: weak and strong. Deriving the Keynes-Ramsey rule of consumption under preferences of the Uzawa-Epstein recursive class and examining the optimal consumption-wealth relation, the paper studies the restrictions that these forms impose on the utility functional, identifies the necessary and sufficient conditions for the hypothesis to hold, and clarifies how such conditions are related to the neutrality of money. JEL Classification Numbers: D91, E21, E40, C61. [ABSTRACT FROM AUTHOR]

The study examines the aggregate dividend behavior of U.S. corporations based on the permanent earnings hypothesis. Using annual data of aggregate earnings and dividends from 1871-1993, I find that although managers change dividends proportional to permanent earnings changes, they make revisions with a larger percentage change in dividends than in permanent earnings. The results from the post-war data show that firms follow a partial adjustment policy with a long-term dividend payout target in mind and make revisions with a delay. The quarterly data analysis yields results similar to those of the post-war annual data. [ABSTRACT FROM AUTHOR]

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. Our approach cannot explain the actual skewness in consumption-income ratios under even the strictest consumptionsmoothing model, which implies that income measurement error or other anomalies are affecting the data. [ABSTRACT FROM AUTHOR]

Investigates the consistency of aggregate consumer borrowing with the permanent income/life-cycle hypothesis in the United States. Predictive power of consumer borrowing; Correlation between consumer borrowing and estimates of permanent and current income; Association between large borrowing and rate of income growth.

Quarterly aggregate data from Korean urban households is used to test the restrictions on the vector autoregressive (VAR) representation of the permanent income hypothesis (PIH). In testing these restrictions, an alternative consumption measure is proposed which takes account of the flow of services from durable goods. For comparison, two commonly used measures- total consumption expenditures and expenditures on non-durables and services- are also employed in the empirical analysis, and the results show that the choice of consumption measures could have a significant effect on the results of the tests, leading to a false conclusion with the improper consumption variables. [ABSTRACT FROM AUTHOR]

We study the effect of income uncertainty on consumption in a model that includes precautionary saving. In contrast to previous studies, we focus on time-series variation in income uncertainty. Our time-series measure of income uncertainty is constructed from a panel of forecasts. We find evidence of precautionary saving in that increases in income uncertainty are related to increases in aggregate rates of saving. We also find evidence that anticipated income growth rates have less explanatory power for consumption growth rates after conditioning on income uncertainty. The evidence indicates the presence of forward-looking consumers who gradually adjust precautionary savings in response to changing income uncertainty. [ABSTRACT FROM AUTHOR]

This article evaluates the key implication of rational expectations and the basic life-cycle/permanent-income hypothesis, which states that predictable changes in income have no effect on the growth rate of consumption expenditures. This implication is important for understanding the effectiveness and optimal timing of fiscal policy, the causes and propagation of business cycles, and the effects of income fluctuations on the growth rate of the economy. Using household-level consumption data from the Consumer Expenditure Survey, this article examines whether expenditures on nondurable goods increase contemporaneously with predictable changes in Social Security tax withholding.

Empirical research on the permanent-income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent-income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth. [ABSTRACT FROM AUTHOR]

Within the errors-in-variables framework, a model of consumer behavior that includes permanent and transitory income is estimated from the 1952 Oxford Savings Survey data and used to test the assumptions of the permanent-income hypothesis. The analysis is extended to the case in which the variables determining permanent income and the case in which the variables determining transitory income are measured with error. In the former case, the tests of the permanent-income model remain valid, but in the latter case errors in measurement lead to a reduction in the estimate of the marginal propensity to consume out of transitory income. [ABSTRACT FROM AUTHOR]

The article discusses the rational expectations-permanent income hypothesis within the context of Latin American and Caribbean countries. Evidence is presented that both refutes the hypothesis and suggests the presence of liquidity restraints in those countries. Consequently, a more vigorous role for government credit and fiscal policies may be indicated.

Examines the challenge to the permanent income hypothesis posed by the savings shortfall that followed the post-1973 slowdown. Prediction of savings response; Linearized infinite-horizon specification; Percentage growth rates before and after 1973; Forecasted growth after 1973; Actual savings response to productivity slowdown; Other influences on saving.

The purpose of this paper is to remove these data and methodological deficiencies and to offer new evidence on the effects of permanent income and housing price on the demand for housing. Section II reviews recent studies based on micro units, Section III describes the basic method of this study, Sections IV and V present empirical results and make comparisons with other estimates, and finally, Section VI provides the conclusions.
In order to derive more conclusive evidence on the demand for housing, we introduced a number of innovations in this study. First, we incorporated the price of non-housing goods in the demand function for housing, thus avoiding a specification error present in other studies. Second, we employed a more rigorous estimation procedure using a lagged income of up to four years as the instrumental variable for permanent income. Third, we used various definitions of income and, in particular, the definition of full income that included a host of non-pecuniary incomes. Finally, we utilized the longest reinterview data (i.e., 5-year successive surveys) and the appropriate housing price data. [ABSTRACT FROM AUTHOR]

For thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income. (This paper considers the evidence for the contrary position, that permanent income is in fact less smooth than measured income, so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory.) The paper argues that in postwar U.S. quarterly data, consumption is smooth because it responds with a lag to changes in income. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to introduce a measure of the uncertainty in different earnings paths. The measure proposed has two desirable properties. First, given appropriate data, it is relatively easy to estimate. Second, under the assumptions of the life-cycle permanent-income theory of individual decision making, it can be used to provide a partial preference ordering over alternative earnings paths. As a result, the measure presented here ought to prove helpful in analysing an assortment of decisions, be they individual decisions or policy alternatives, which have long-term effects on earnings. Examples include decisions which affect schooling, on-the-job training, unionization, migration, and sector of employment. Although the concept of uncertainty in earnings paths has been discussed extensively in the literature, very little empirical work has been done on it. In this paper a different approach to measuring the uncertainty in different earnings paths has been proposed. Rather than making assumptions on the process that generates earnings, the behavioural assumption that the life-cycle theory of consumption determines consumption expenditures has been made.

THIS review attempts to synthesize recent currents of thought in consumer economics. The focus is on the determination of total consumption (and saving) rather than on the allocation of the total by categories of consumption. The latter, usually classified under the heading of consumer demand functions, is a major topic in itself, and is covered in some detail in a comprehensive recent review article by Alan Brown and Angus Deaton [31, 1972]. Hence, the emphasis in this review is on the macro aspects of consumer economics, but with attention to micro aspects insofar as they interrelate with the former or involve relevant topics from other social sciences or branches of economics that have received little attention by consumer economists. Section 2 is a review of general theories of the consumption function. Section 3 of the paper considers the more recent work on the role of the ceteris paribus conditions of the consumption function and their effects on consumer behavior. Section 5 of the paper turns to recent advances in the economics literature that are in many ways extensions of received theory, in particular, the human capital approach and the growing interest in time allocation and in the view of the household as a producer. It would be remiss in a survey article of this type not to give attention to work in the other social sciences that may impinge and provide interesting insights on consumer economic behavior. In particular, attention is given in Section 6 to such relatively recent questions as decision-making within the consumer unit, the use of information and the role of reference groups in decision-making. Decision-making and the likely heterogeneity of consumer units are topics with potentially fundamental implications for consumer theory and hence are given special attention in this part of the paper. Finally, some concluding remarks are presented, with special reference to future directions for research. [ABSTRACT FROM AUTHOR]

This paper shows that U.S. monthly consumption data are consistent with the permanent income hypothesis (PIH) when transitory consumption and temporal aggregation effects are jointly incorporated into the model. In this case, a more appropriate representation for PIH is the integrated- moving average IMA(1, 1) process with a negative MA coefficient, rather than the repeatedly rejected random walk process Restrictions on the relative importance of transitory and permanent consumption are also discussed, with and without measurement errors.

Under common ARIMA representations of income, the permanent-income hypothesis predicts that the volatility of consumption should be larger than the volatility of unanticipated shocks to income; this prediction is not supported by the data. We examine whether this apparent excess smoothness of consumption is the result of the ARIMA representation's implicit restrictions on low-frequency dynamics. By using a generalized long-memory stochastic representation, we construct confidence intervals for the long-run impulse response of income in the absence of such low-frequency restrictions. These intervals arc quite wide and include regions m which excess smoothness vanishes. [ABSTRACT FROM AUTHOR]

An interesting implication of the structural specification of the unobservable variable model introduced by Arnold Zellner (1970) and extended by Arthur S. Goldberger (1972) is that under certain conditions, which are derived in this paper, the coefficient on the unobserved variable can be consistently estimated even though the equation which generates the unobserved variable is misspecfied. By misspecification is meant any circumstance where the right hand variables, assumed as exogenous, are in fact contemporaneously correlated with the equation disturbances. The article was motivated by the permanent income hypothesis, but the results have implications for estimation in a wider class of models where unobserved variables are included, e.g., certain rational expectation models. The conclusion of this paper is that in the type of model introduced by Zellner in which unobservable variables such as "expected," "desired" or "permanent" variables are included, if interest centers on the coefficients attached to these variables rather than other parameters in the structure, then, the estimators of these particular coefficients are consistent.

This article focuses on the permanent income hypothesis (PIH). It is well known, this leads to a regression of current consumption on personal disposable income and lagged consumption, a form very similar to the consumption function implied by habit persistence hypothesis (HPH). Indeed, it has become almost a practice to consider HPH to be "truly a complete anticipation of" PIH notwithstanding the fact that the focus of the two hypotheses is quite different. In fact, the application of another model to PIH by its nature violates some of the basic assumptions of the latter. Not only does it bring about dependence between the transitory and permanent components of income, but also yields transitory components of income and consumption that may be mutually correlated. This article intends to discuss the basic differences in the two hypotheses and thereby show that it is wrong to identify HPH and PIH with each other. It was also found that the PIH and HPH models, outline various assumptions and examine in what respect the two models are different.

The article presents information on estimating permanent income from observed income and consumption. When attempts are made to estimate the propensity to consumer, the variance, and or the individual values of the unobservable variables, it is often assumed that permanent income is a function of some observable variables. If permanent income is estimated by a linear combination of observed income and observed consumption, then not all the assumptions of the permanent income hypothesis can be satisfied, because the conditions outnumber the parameters. For any given set of weights attached to these conditions, it is possible to define the estimator which gives the best fit to the entire hypothesis, at the cost of not satisfying any of its assumptions or definitions exactly. In addition to that, the article presents various other similar information.

The article examine some of the implications which flow from the assumption that permanent income is the appropriate scale variable in the demand for money function and that expectations are formed rationally. It shows the time series representation of the logarithm of real balances if a long run rate of interest is the appropriate measure of the opportunity cost of holding money or that the opportunity cost follows a random walk. The article also discusses the implications if the demand for money includes income as the appropriate scale variable or, conversely, permanent income formed as a weighted average of current and past incomes.

This article analyzes the evidence in the saving and rational expectations in Great Britain. The evidence in this article suggests that the most striking finding reported by professors Macdonald and Speight is the result of using a faulty labor income series. Once this is corrected, saving negatively Granger-causes the change in labor income. However at the same time, this weak implication of rational expectations-permanent income hypothesis (REPI) appears to hold we find that the full restrictions imposed on the data by REPI can be rejected. And unlike Macdonald and Speight the author of this article find that the case for this rejection appears to be virtually as strong when transitory consumption is allowed for as when it is not.

Studies the role of seasonal adjustment as it impinges on the relationship between consumption and income. Application of cointegration tests to seasonally unadjusted data; Presence of the unit root at the zero frequency; Rejection of the permanent income hypothesis.

This paper investigates whether there are variants of the permanent income model that are consistent with seasonally unadjusted quarterly postwar Canadian data. The analysis is based on a misspecification-test equation which nests the standard permanent income model. The results obtained are somewhat unfavourable to the permanent-income hypothesis. The same results also apply to more general models in which the real interest rate is time-varying and the utility function is non-separable in consumption and the stock of durable goods. [ABSTRACT FROM AUTHOR]

Abstract. The intertemporal approach to the current account is rejected as a complete explanation of the Canadian current account. Federal government fiscal policy plays an important role in the determination of the current account. A private sector agent that treats its holdings of net liabilities of the federal government as net wealth accumulates the sum of these liabilities and the net liabilities of non-residents as part of an intertemporally optimal plan. This result indicates both fiscal policy and intertemporal considerations are important determinants of current account behaviour. [ABSTRACT FROM AUTHOR]

Examines the permanent income hypothesis (PIH) by measuring the extent to which consumption deviates from the PIH. Two methodologies for measuring the deviation from the PIH; Examination whether PIH consumption is a good approximation of postwar United States data; Direct constructions of PIH consumption; Monte Carlo simulations.

This paper presents new evidence on the aggregate (time-series) variant of the permanent income hypothesis. Using flexible-lag procedures, estimates are derived that suggest that permanent income depends largely upon recent income receipts, thus calling into question a central assumption of the original Friedman theory. The results of the study also raise doubts about the empirical validity of other elements of the aggregate variant of the permanent income theory. [ABSTRACT FROM AUTHOR]

This article presents new estimates of persistence of shocks to quarterly labor income, monthly treasury-bill yields. and annual real common-stock dividends. We replace orthogonality conditions involving near-unit-root instruments with restrictions on innovation variances implied by a generalized version of the permanent income hypothesis, a term-structure model, and constant-discount-rate efficient-markets model. Conditional on these theories, we obtain precise estimates of persistence without imposing arbitrary restrictions on the magnitude of the largest root. Shocks are more persistent than indicated by unrestricted trend-stationary models hut less persistent than implied by unit-root models [ABSTRACT FROM AUTHOR]

The permanent income hypothesis under certainty equivalence yields a martingale consumption process. Empirically, this hypothesis is rejected because consumption is excessively sensitive to anticipated income. One approach to account for excess sensitivity is to relax certainty equivalence by using utility functions that induce precautionary saving. This article analyzes a hyperbolic absolute risk-aversion utility function. Empirically, some reasonable parameterizations of this specification allow one to match the excess sensitivity associated with the data. These parameterizations also permit one to account for the excess smoothness problem. Excess sensitivity and excess smoothness, however, do not reflect the same phenomenon. [ABSTRACT FROM AUTHOR]

This article reexamines the consistency of the permanent-income hypothesis with aggregate postwar U.S. data. The permanent-income hypothesis is nested within a more general model in which a fraction of income accrues to individuals who consume their current income rather than their permanent income. This fraction is estimated to be about 50%, indicating a substantial departure from the permanent-income hypothesis. Our results cannot be easily explained by time aggregation or small-sample bias, by changes in the real interest rate, or by nonseparabilities in the utility function of consumers. [ABSTRACT FROM AUTHOR]

This article reports the results of progressive refinements in the models used to test the permanent-income hypothesis. These tests are undertaken with a household panel, constructed from diaries, by the Norwegian Central Bureau of Statistics. The data combine detailed expenditure and price information with income and wealth data from the government's tax files for 1975-1977. Using a model that takes account of relative price change and demographic variables, recognizes the effects of durables, and incorporates explicit recognition of the effects of differences in the timing of observations or income innovations and spending, the results indicate that the data are consistent with the permanent-income/life-cycle hypothesis. [ABSTRACT FROM AUTHOR]