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Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence

Robert E. Hall^1,2,3

¹ National Bureau of Economic Research · ² Stanford University · ³ Hoover Institution

Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle-permanent income hypothesis.

DOI

10.1086/260724

Volume

86 (6)

Pages

971-987

Language

en

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BibTeX

Sources

crossref openalex