Consumption Growth Parallels Income Growth: Some New Evidence
Lawrence H. Summers
This paper argues that the versions of both permanent income and
life-cycle theories which have recently become fashionable are
inconsistent with the grossest features of cross-country and crosssection
data on consumption and income. There is clear evidence tha:
consumption and income gr:wth are much more closely linked than wOu be
predicted by these theories. it appears that consumption smoothing
takes place over periods cf several years not several decades.
These results confirm Milton Friedman's (1957) initial view that:
"The permanent income corrpcnent is not to be regarded as expected
lifetime earnings... It is to be interpreted as the mean income at any
age regarded as permanent by the consumer unit in question, which in
turn depends on its horizon and foresightedness." They call into
question the usefulness of standard representative Consumer apprcaches
to the analysis of saving behavior. And they call for increased
emphasis on liquidity constraints and short run precautionary saving as
determinants of consumption behavior.
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