The Adjustment of Consumption to Changing Expectations About Future Income

  title={The Adjustment of Consumption to Changing Expectations About Future Income},
  author={Marjorie Flavin},
  journal={Journal of Political Economy},
  pages={974 - 1009}
The paper analyzes the role of current income in providing new information about future income and thus signalling changes in permanent income. Using time-series analysis to quantify the revision in permanent income induced by an innovation in the current income process, a structural econometric model of consumption is developed. The rejection of the joint rational expectations-permanent income hypothesis is both statistically and quantitatively significant. The paper also shows that the test… Expand
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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 itselfExpand
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Estimates of a rational expectations version of Friedman's time-series consumption model are obtained by imposing the pertinent restrictions across the stochastic processes for consumption andExpand
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