Discussion Paper

The permanent income hypothesis when the bliss point is stochastic

Abstract: A version of the permanent income model is developed in which the bliss point of the agent is stochastic. The bliss point depends on realizations of the stochastic process generating labor income and a random shock. The model predicts consumption and labor income share a common trend and that a linear combination of current consumption, current labor income, and once lagged consumption is stationary. Empirically, consumption appears more serially correlated than the model is capable of supporting. Further, the volatility of consumption appears sensitive to time variation in real interest rates.

Keywords: Income distribution;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1991

Number: 46