Permanent income hypothesis

The permanent income hypothesis is a hypothesis in macroeconomics according to which private households base their consumption decisions on their permanent income, i.e. the average lifetime income. It is largely based on Milton Friedman 's 1956 work "A Theory of the Consumption Function".

background

In the macroeconomic view of expectations and consumer demand for a longer period of time, the temporary assumptions made in the IS-LM model , for example, can not be used any further. Rather, there are various income hypotheses that try to make valid forecasts using different approaches. According to the hypothesis, private households make their consumption decisions not on the basis of their short-term disposable income , but on the basis of their permanent income. The permanent income is the average income per period that a household expects, taking into account a longer time horizon.

The conclusion of the hypothesis is that temporary, short-term changes in income of consumers have only a minor impact on their consumption expenditure (marginal propensity to consume is very small), while permanent changes in income can have greater effects on consumer behavior. Like the life cycle hypothesis, the permanent income hypothesis is a further development of the Keynesian consumer function .

Dogmatic approach

Households earn in each period a certain income , which is different from the income of the next period , can be. For the sake of simplicity, this is based on an infinite time horizon, which can be translated using inheritance motifs. Income is made up of the present values of labor income , financial income and corporate income . The total wealth is the sum of all discounted future income: ${\ displaystyle t}$ ${\ displaystyle Y_ {t}}$ ${\ displaystyle t + 1}$ ${\ displaystyle Y_ {t + 1}}$ ${\ displaystyle X_ {t}}$

${\ displaystyle X_ {t} = Y_ {t} ^ {d} + {\ frac {Y_ {t + 1}} {1 + r_ {t}}} + \ ldots + {\ frac {Y_ {t + n }} {(1 + r_ {t}) ^ {n-1}}} + \ ldots}$

The permanent income is the weighted average of all future income at the point in time . Alternatively, wealth can be represented as the sum of the harmonic mean as the sum of the discounted flows of permanent income: ${\ displaystyle {\ tilde {Y}} _ {t}}$ ${\ displaystyle t}$

${\ displaystyle X_ {t} = {\ tilde {Y}} _ {t} + {\ frac {{\ tilde {Y}} _ {t}} {1 + r_ {t}}} + \ ldots + { \ frac {{\ tilde {Y}} _ {t}} {(1 + r_ {t}) ^ {n-1}}} + \ ldots = {\ tilde {Y}} _ {t} \ left [ 1 + {\ frac {1} {1 + r_ {t}}} + \ ldots + {\ frac {1} {(1 + r_ {t}) ^ {n-1}}} + \ ldots \ right] }$

Using simple algebra, the sum can be reduced: ${\ displaystyle X_ {t} = {\ tilde {Y}} _ {t} {\ frac {1} {1 - {\ frac {1} {1 + r_ {t}}}}}} = {\ tilde { Y}} _ {t} {\ frac {1 + r_ {t}} {r_ {t}}}}$

The permanent income can thus be understood as a perpetual annuity on the assets of an economic subject:

${\ displaystyle {\ tilde {Y}} _ {t} = {\ frac {r_ {t} X_ {t}} {1 + r_ {t}}}}$

The corresponding consumption function is then: . ${\ displaystyle C_ {t} = C ({\ tilde {Y}} _ {t}) = C \ left ({\ frac {r_ {t} X_ {t}} {1 + r_ {t}}} \ right)}$

Political Implications

The hypothesis can explain why consumption incentives for households through tax cuts or similar do not have the effects on aggregate demand predicted by the Keynesian theory . In Keynesian theory, the marginal propensity to consume has arrived as constant. This means that a household puts the same proportion of every additional euro available in income into consumption. On the other hand, there is the hypothesis of permanent income, according to which the marginal propensity to consume depends on the wealth of the household. Correspondingly, a one-off increase in income will have fewer effects, because households spread the profits over a longer time horizon.

Matthew D. Shapiro and Joel Slemrod found empirical evidence for this one view in their 2003 article Consumer Response to Tax Rebates .

literature

Milton Friedman: A Theory of the Consumption Function . Princeton University Press, Princeton, NJ 1956, ISBN 978-0-691-13886-2 , pp. 296 (English, nber.org [PDF]).
Franz W. Peren: Income, consumption and savings of private households in the Federal Republic of Germany since 1970: Analysis using macroeconomic consumption functions. Peter Lang, Frankfurt am Main / Bern / New York 1986, ISBN 3-8204-9006-X .

Individual evidence

^ A Two-Period Model: The Consumption-Savings Decision and Credit Markets. In: Stephen D Williamson: Macroeconomics. Pearson, Canada 2010, ISBN 978-0-321-66140-1 .
↑ Shapiro, Matthew D. and Joel Slemrod: Consumer Response to Tax Rebates . In: American Economic Review . tape 93 , no. 1 , 2003, p. 381-396 (English).

[1] A Two-Period Model: The Consumption-Savings Decision and Credit Markets. In: Stephen D Williamson: Macroeconomics. Pearson, Canada 2010, ISBN 978-0-321-66140-1 .

[2] Shapiro, Matthew D. and Joel Slemrod: Consumer Response to Tax Rebates . In: American Economic Review . tape 93 , no. 1 , 2003, p. 381-396 (English).