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The test of the permanent income hypothesis
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The test of the permanent income hypothesis

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Content THE TEST OF THE PERMANENT INCOME HYPOTHESIS
VI
by
Ayhan Oner
u i
A Thesis P resented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In P a r t i a l F u lfillm e n t of the
Requirements fo r the Degree
Master of A rts
(Economics)
January 1968
U M I Number: EP44857
All rights reserved
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a note will indicate the deletion.
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UMI EP44857
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UNIVERSITY O F S O U T H E R N C A LIFO R N IA
T H E GRADUATE SC H O O L
U N IV ER SITY PARK
LO S A N G ELE S, C A LIFO R N IA 9 0 0 0 7
Ee. % % o fg
This thesisj written by
..............................AYHAN ONER
under the direction of h..X$..Thesis Committee,
and approved by all its members, has been pre­
sented to and accepted by the Dean of The
Graduate School, in partial fulfillment of the
requirements for the degree of
MASTER OF ARTS
c
Dean
Date..
THESISrQOMMITTE:
TABLE OF CONTENTS
Page
LIST OF T A B L E S ................................................................................. iv
INTRODUCTION ...................................................................................... v
Chapter
I . HYPOTHESES ON THE CONSUMPTION FUNCTION
AND THEIR IMPLICATIONS ........................................... 1
A bsolute Income H ypothesis
H ypothesis
Em pirical Evidence and Im p lic a tio n s
R e lativ e Income Hypothesis
Hypothesis
Em pirical Evidence and Im p lic a tio n s
Permanent Income H ypothesis
H ypothesis
E m pirical Evidence and Im p lic a tio n s
I I . PREVIOUS TESTS OF THE PERMANENT
INCOME HYPOTHESIS ..................................................... 11
T est 1— F rie d m a n s Own T ests
Support from Budget S tu d ies
Support from Tim e-Series Data
T est 2—Consumption P a tte rn s and
Permanent Income
T est 3— The Permanent Income Hypothesis
T est 4 --W in d fa ll Income and Consumption
T est 5—W indfall Income and Consumption
T est 6— The P ro p e n sity to Consume
Permanent Income
I I I . INTERNATIONAL TIME-SERIES ANALYSIS .................... 31
Data, Procedure, and Sample
C a lc u la tio n of the Permanent
Income: The T est
R e la tio n sh ip between Rate of I n t e r e s t
and R atio of Consumption to Perma­
nent Income (k)
* •
l i
Chapter
C onclusion
APPENDIX .
BIBLIOGRAPHY
LIST OF TABLES
I Table Page
1. Consumption-Income R atio s by Income
C lass fo r A ll Urban C onstant and
Nonconstant Income F am ilies, United
2. Consumption-Income R atio s by
Occupation Urban United S ta te s ,
3. Marginal P ro p e n sity to Consume (Upper
Figures) and Income E l a s t i c i t y
(Lower F igures) by C ity C la s s ,
Occupation, and Age of Head
United S ta te s Urban Consumers,
S ta te s , 1950
17
1950 19
1950 22
i v
INTRODUCTION
A ll modern th e o r ie s , s t a r t i n g w ith Keynes, r e l a t e
consumption, in the f i r s t in s ta n c e , to income. These
th e o rie s d i f f e r from one another in two r e s p e c ts . F i r s t ,
whether or not the r e la tio n s h i p between consumption and
income i s one of p r o p o r ti o n a li ty , so th a t the average and
m arginal p r o p e n s itie s to consume c o in c id e ; second, whether
j income should be regarded as p a s t, c u r r e n t, expected, or
some com bination of the th r e e . As w ill be explained in
the follow ing c h a p te r, im p lic a tio n s o f these th e o rie s are
j very d i f f e r e n t .
I
1 Since the adequacy o f any p o lic y measure based on
i
j some im p lic a tio n of one of the th e o r ie s w i l l n e c e s s a rily
depend on the accuracy of the th e o ry , i t seems th a t an
attem pt a t te s tin g these th e o rie s would be of some value.
This study p re s e n ts a new way to t e s t Friedman*s
"Permanent Income H ypothesis."
CHAPTER I
HYPOTHESES ON THE CONSUMPTION FUNCTION
AND THEIR IMPLICATIONS
ABSOLUTE INCOME HYPOTHESIS
H ypothesis
That consumption ex p en d itu res are a s ta b le func­
tio n of r e a l income le v e l i s Keynes* fo rm u latio n of the
r e la tio n s h i p between consumption and income, both on i n ­
d iv id u a l and aggregate l e v e ls . According to Keynes*
f i r s t "p sy ch o lo g ical law ," the m arginal p ro p en sity to
consume i s p o s itiv e bu t le s s than one; according to h is
second p sy ch o lo g ical law, the m arginal p ro p e n sity to con­
sume d e c lin e s as income r i s e s . Keynes was convinced of
th e accuracy of the f i r s t of th ese p sy ch o lo g ical laws but
not n e c e s s a r ily of the second. Even the le s s r e s t r i c t i v e
f i r s t p sy ch o lo g ical law im p lie s , however, th a t the mar­
g in a l p ro p en sity to consume i s sm aller than the average
p ro p en sity to consume, and hence the r a t i o of consumption
to income, the average p ro p en sity to consume, d ecreases
as income r i s e s .
1
Em pirical Evidence and Im p lic a tio n s
2
Almost w ith o u t exception budget s tu d ie s show
a r e la tio n s h i p between fam ily income and t o t a l
fam ily consumption lik e th a t which Keynes p o stu ­
la te d fo r the t o t a l economy: low income fa m ilie s
t y p ic a l ly d iss a v e ; high income f a m ilie s ty p ic a lly
spend le s s than income. As one moves along the
d i s t r i b u t i o n from lower to h ig h er incomes average
consumption r i s e s , but by le s s than income; and
the higher the income the le s s the r i s e in con­
sumption from a f u r th e r increm ent o f incom e.1
Let us consider the im p lic a tio n s of t h i s :
1. Since consumption i s a s ta b le fu n c tio n of the
le v e l of r e a l income, t h i s h y p o th esis makes i t p o s s ib le to
p r e d ic t the percentage of income consumed from the knowl­
edge of the le v e l of r e a l income, an im p lic a tio n of v i t a l
importance fo r economic p o lic y .
2. Since the le v e l of income i s p o s itiv e ly r e ­
la te d to the amount a v a ila b le both fo r consumption and
saving, a lower income w i l l lead to a sm aller amount of
saving.
3. The second p sy ch o lo g ical law im p lies t h a t wide
in e q u a lity of income d i s t r i b u t i o n i s expected to tend
toward a high savings r a t i o . This pro v id es a p la u s ib le
e x p lan atio n fo r the more rap id development of r ic h than
of poor c o u n trie s .
4. As aggregate income r i s e s in a country, high-
income fa m ilie s g e t most of the in c re a s e .
^Gardner Ackley, Macroeconomic Theory (New York:
The Macmillan Company, 1965), p. 221.
RELATIVE INCOME HYPOTHESIS
3
Hypothesis
The r e l a t i v e income h y pothesis r e l a t e s to i n d i ­
v id u a l consumers and s t a t e s th a t r e l a t i v e income r a th e r
than ab so lu te income determ ines a f a m i l y ^ consumption.
In d iv id u a l consumption p a tte r n s are i n t e r r e l a t e d , and the
amount of income spent on consumption by an in d iv id u a l
depends on the r a t i o of h is income to the su p e rio r income
le v e l of o th er people w ith whom he may come in c o n ta c t.
Nurkse, in h is book, Problems of C a p ita l Formation
in Underdeveloped C ountries R a f t e r p o in tin g out very g re a t
in t e r n a t i o n a l d is c re p a n c ie s in le v e ls of liv in g and the
f a c t t h a t communication i s so much c lo s e r than ever be­
f o r e , argues t h a t th e a t t r a c t i o n o f consumption stan d ard s
of advanced c o u n trie s may in flu e n c e o th e r c o u n trie s w ith
r e l a t i v e l y low liv in g sta n d a rd s. In o th er words, h is
c o n te n tio n i s t h a t aggregate consumption o f vario u s
c o u n trie s are i n t e r r e l a t e d —via the dem onstration e f f e c t —
in such a way t h a t the consumption p a tte r n s of r ic h coun­
t r i e s in flu e n c e s t h a t o f the poor c o u n trie s .
2
| Ragnar Nurkse, Problems of C a p ita l Formation in
Underdeveloped C o u n tries (New York: Oxford U n iv e rsity
P re s s , 1964).
E m pirical Evidence and Im p lic a tio n s
We considered whether th e re was a c o r r e la tio n be­
tween income s iz e and saving r a t i o . This hypothesis was
not borne out by c r o s s - s e c tio n a l fam ily budget data ( a t
any given p o in t of tim e ). On the o th e r hand, tim e - s e r ie s
data (fam ily budget d ata in d i f f e r e n t p e rio d s of time)
I seemed to provide some support fo r the h y p o th e sis.
t
j The average urban fam ily in the United S ta te s
| in 1917-19, earning 1,500 d o l l a r s a year in terms
i of 1941 p r ic e s , saved 120 d o l l a r s or 8 p e rc e n t.
An average fam ily w ith the same r e a l income in
1941 saved p r a c t i c a l l y n o th in g .3 ,
The im p lic a tio n s of t h i s are the follow ing: [
1. As a r e s u l t of the interdependence of con­
sumption f u n c tio n s , in e q u a lity of income d i s t r i b u t i o n in
a country may reduce the saving r a t i o , a conclusion which !
I
i s opposed to the a b so lu te income h y p o th e sis. |
2. Nurkse p o in ts out t h a t what i s im portant fo r |
I
i n d u s t r i a l l y backward c o u n trie s i s to dim inish the gap
between t h e i r income le v e l and t h a t of advanced c o u n trie s .
He also s t a t e s t h a t fo re ig n aid and fo re ig n investm ent do
not g u aran tee a re d u c tio n in t h i s gap. His e x p lan atio n
i s as fo llo w s:
i The r a t e of saving and investm ent in an advanced
i i n d u s t r i a l economy i s not a fix e d magnitude. I f i t
^ Ib id . , p. 59.
5
were, then in c re a se d fo re ig n investm ent would mean
a re d u c tio n in domestic investm ent. But advanced
c o u n trie s have sometimes been s u b je c t to condi­
tio n s of underemployment, in which an in c re a s e in
fo re ig n investm ent need not be a t the expense of
domestic investm ent a t a l l , but may, on the con­
t r a r y , in c re a se the volume of domestic investm ent
and saving. Even i f we d is re g a rd the p o s s ib le
r e tu r n s from fo re ig n investm ent we must conclude
t h a t fo re ig n investm ent i s no guarantee of dim in­
ish in g the d is ta n c e between the r ic h and the poor;
i t may in c re a se i t . 4
PERMANENT INCOME HYPOTHESIS
i
H ypothesis 1
I According to the permanent income h y p o th e sis, put j
forward by M ilton Friedman, the b a s ic r e l a t i o n s h i p between
consumption and income should more c o r r e c tly be i d e n t i f i e d
i
i
j as one of p r o p o r tio n a lity between "permanent" consumption
i
and "permanent" income. Both consumption and income con­
s i s t of permanent and t r a n s i t o r y elem ents. The permanent
element of income r e f l e c t s the e f f e c t of those f a c to r s
th a t the consumer u n it co n sid ers as determ ining i t s
w ealth . Human, as w ell as non-human w ealth , are such |
f a c t o r s . The t r a n s i t o r y component r e f l e c t s a l l o th er !
f a c t o r s which are considered by the decision-m aking u n it !
as a c c id e n ta l o cc u rren ces.
The hypotheses and the assum ptions are form ulated
by Friedman as fo llo w s.
4I b id ., p. 66
These th re e equations are the hypotheses:
[1 ] Cp = k ( i , w, u) Yp ,
where,
i = Rate of i n t e r e s t
w = R atio of non-human w ealth to permanent
income
u = F acto rs determ ining the consumer u n i t 's
p re fere n c e s fo r consumption versus
saving.
[2] Y = Yp + Yt
[3] C = C p + C t
The hypotheses r e s t on the follow ing th re e
assum ptions:
[1] Kv v = 0 the t r a n s i t o r y and perma-
“ t 7 p
nent components of income are
u n c o r r e la te d .)
[2] Rc c = 0 ( i . e . , the t r a n s i t o r y and perma-
x p
nent components of consumption
are also u n c o rre la te d .)
[3] Rc ^ _ = 0 ( i . e . , t r a n s i t o r y income cannot
give r i s e to t r a n s i t o r y con­
sumption. )
Consumption, according to the model, i s d efin e d as
the value of s e rv ic e s enjoyed by the consumer u n it during
the perio d in q u e s tio n . T h erefo re, ex p en d itu res on d u r­
able goods are not to be considered as consumption. In
j f a c t , Friedman h im self has used in h is c a lc u la tio n s con-
sumption fig u re s in c lu d in g ex p en d itu res on durable goods,
p o in tin g out th a t s e rv ic e s rendered by durable goods p u r­
chased in previous time p erio d s would c o n s titu t e an o f f s e t
a g a in s t t h i s b ia s . But during y e a rs when stocks of con­
sumers* d u rab les are r i s i n g the conventional d e f i n i t i o n
of consumption ex p en d itu res o v e r s ta te s consumption as
d efin e d in t h i s th e o ry .
Permanent income, u n fo rtu n a te ly , cannot be ob-
t
served d i r e c t l y . I t has to be estim ated from d ata on
measured income as a weighted average of income fo r a
number of y e a rs . Friedman s t a t e s th a t the time horizon
of in d iv id u a l household i s approxim ately th ree y e a rs , but
i
he a lso adds th a t d ata them selves should d i c t a t e the
a p p ro p ria te number of y e a rs .
The observed r e la tio n s h i p between measured income
and measured consumption which fam ily budget d ata re v e a l
i s explained by Friedman as fo llo w s.
c = a + by (Measured consumption as a fu n ctio n
of measured income.)
8
b = ^  l-i?,)—i x ," x l (The re g re s s io n c o e f f i -
Z(y - y)2
c i e n t . )
= (yp - ? p )2
E(Y - y)2
b = k Pv , where Pv = A x p/ A y
I f A Yp, the change in permanent income, is equal
to A y , the change in measured income, Py becomes equal to
u n ity and (b )— the r e g re s s io n c o e f f i c i e n t — to (1 ). In
o th e r words, i f the change in measured income c o n s is ts
only of the permanent component, the m arginal p ro p en sity
tim es the change in measured income w i l l be consumed. I f ,
on the o th e r hand, A y p i s equal to zero , Py becomes zero
and so does (b), which means t h a t i f the change in meas­
ured income i s a change only in the t r a n s i t o r y component,
t h i s change w i l l not be consumed.
Em pirical Evidence and Im p lic a tio n s
Friedman provides em p irical support fo r h is theory
both from c r o s s - s e c tio n a l and tim e - s e r ie s d a ta . This
support and the r e s u l t s of em p irical s tu d ie s done by
o th e rs on the theory w i l l be d isc u sse d in the next chap­
t e r . The follow ing are the most im portant im p lic a tio n s
of the model:
9
, 1. Since the h y pothesis a s s e r t s th a t consumption
fo r a fam ily or fo r a country is a c o n sta n t (k), tim es
I permanent income, th e r e f o r e , the r a t i o of consumption to
I
j permanent income i s independent of the le v e l of income.
This im p lie s , on the one hand, t h a t high-income groups
save th e same p ro p o rtio n o f t h e i r permanent income as low
income groups, in o th e r words, th a t the poor and the r ic h
consume the same p ro p o rtio n of t h e i r permanent incomes,
and on the o th e r hand, th a t the percentage of income con­
sumed cannot be p re d ic te d from the info rm atio n on the
le v e l of income.
2. I f c = k Yp and Rc t Yt = 0, consumption and
t r a n s i t o r y income are u n c o rre la te d . I t follow s th a t tr a n ­
s it o r y income— the d iffe re n c e between measured and p e r­
manent income— i s com pletely saved and t h a t measured
consumption i s a r e f l e c t i o n n ®f permanent consumption.
3. Although, on the permanent income hypoth­
e s i s , a low le v e l of r e a l income does not make
j fo r a low savings r a t i o , a ra p id r a t e of r i s e in
income, whatever the le v e l, may do so. The r e a ­
son i s th a t a r i s e expected to continue tends to
r a i s e permanent income r e l a t i v e to measured i n ­
come and so to r a i s e consumption r e l a t i v e to
measured income.
Whether t h i s e f f e c t shows i t s e l f i s lik e ly to
i depend c r i t i c a l l y on the source of the r i s e in
r e a l income. I f i t r e f l e c t s development financed
a t l e a s t in p a r t from domestic c a p i t a l in an
environment which makes fo r a high r a t e of r e tu r n
on domestic c a p i t a l , the high r a t e of r e tu r n to
savings i s an o f f s e t to the high r a t i o of perma­
nent to c u rr e n t income and may w ell be more
10
im p o rtan t. On the o th er hand, i f the r i s e in
income r e f l e c t s p rim a rily on e x te rn a l stim ulus
th a t gives l i t t l e or no r o le to domestic c a p i t a l ,
th e re may be no o f f s e t and one might expect the
saving r a t i o to f a l l . 5
i
I
! 4 . According to the permanent income hypoth­
e s i s , the e f f e c t of in e q u a lity (of income d i s ­
tr ib u ti o n ) depends c r i t i c a l l y on the source of
the in e q u a li ty . In s o fa r as the in e q u a lity i s
a t t r i b u t a b l e to d if fe re n c e s in permanent income
s t a t u s , i t has no e f f e c t on savings r a t i o . I n ­
so fa r as i t i s a t t r i b u t a b l e to d if f e re n c e s in
t r a n s i t o r y components, i t does, because in e q u a l-
; i t y then means u n c e rta in ty about income p ro sp ec ts
j and hence in c re a s e s the need fo r a re se rv e a g a in s t
i em ergencies, what i s fav o rab le to a high savings
r a t i o i s not in e q u a lity per se but u n c e rta in ty
i provided, of co u rse , i t i s u n c e rta in ty of a kind
! th a t does not reduce the average r a t e of r e tu r n
on c a p i t a l . 6
^Milton Friedman, A Theory of the Consumption
Function (P rin ce to n : P rin c e to n U n iv e rsity P re s s , 1957),
p. 234.
i
! 6I b i d . , p. 235.
CHAPTER II
PREVIOUS TESTS OF THE PERMANENT INCOME
HYPOTHESIS
The permanent income h y p o th esis has been te s te d
many tim es on d i f f e r e n t grounds. In t h i s c h a p te r, only
six of th e se t e s t s , which were considered most im p o rtan t,
w i l l be d isc u sse d .
TEST 1
FRIEDMAN'S O W N TESTS
Friedman him self m a rsh alls some support fo r h is
hypothesis by co n sid erin g some em p irical fin d in g s th a t
seem to c o n tra d ic t the ab so lu te income h y p o th e sis, both on i
budget study and tim e - s e r ie s b a se s. These fin d in g s are
the follow ing: (a) Average p ro p en sity to consume has been i
i
f a i r l y c o n s ta n t in the United S ta te s as measured by tim e- j
s e r ie s d a ta , in s p ite of a s u b s t a n tia l r i s e in r e a l income
over the p a s t h a l f ce n tu ry , (b) Average p ro p en sity to
consume in budget s tu d ie s has been s im ila r fo r widely
se p a ra te d a te s , in s p it e of s u b s t a n tia l d if fe re n c e s in
average r e a l income, (c) There has been a d e c lin e over
time in the in e q u a lity of income.
11
12
Support from Budget S tu d ies
1. Temporal Changes in I n e q u a lity of Income.
R eferrin g to Simon Kuznets* fin d in g t h a t em p irical
data show no tendency fo r the in e q u a lity of income to i n ­
c re a s e , Friedman b e lie v e s t h a t th e re i s an o p p o site
tendency, which he i n f e r s from re g re s s io n s of consumption
on income, and uses i t as a support fo r h is h y p o th e sis.
On the b a s is of the permanent income h y p o th e sis, the ob­
served re g re s s io n s give no evidence on the se c u la r be­
h avior of the in e q u a lity of income.
2. Consumption-Income R egressions fo r D iffe re n t
Dates and Groups.
W e may summarize Friedman*s fin d in g s of d i f f e r e n t
budget s tu d ie s fo r d i f f e r e n t c o u n trie s , d ates and groups
as follows:-*-
a) The average p ro p en sity to consume i s s im ila r
fo r d i f f e r e n t s tu d i e s . They vary between 0.89 and 0.92
fo r the United S ta te s .
b) The average p r o p e n s itie s are h ig h er in
B r i t i s h and Swedish s tu d i e s .
c) The m arginal p r o p e n s itie s vary more widely
than the average p r o p e n s it ie s . In the United S ta te s they
range between 0.67 and 0 .7 9 .___________________________________
lM ilton Friedman, A Theory of the Consumption
Function (P rin c e to n : P rin c eto n U n iv e rsity P re s s , 1^57),
Table 1, p. 41.
13
d) Fox every r e g re s s io n , the m arginal p ro p e n sity i
i s le s s than the average p ro p e n sity .
i
In view of th e se fin d in g s , i t i s not p o s s ib le , he !
reaso n s, to regard th e se re g re s s io n s as e stim a te s of a
s ta b le r e l a t i o n between consumption and income. Since the
m arginal p ro p en sity i s le s s than the average p ro p e n sity ,
the income e l a s t i c i t y of consumption, which i s the r a t i o
of the m arginal p ro p e n sity to the average p ro p e n sity ,
tu rn s out to be le s s than u n ity . An e l a s t i c i t y of t h i s
l
i kind shows th a t a r i s e in income produces a d e c lin e in the
i
j r a t i o of consumption to income. T h erefo re, the s t a b i l i t y |
j in average p r o p e n s itie s i s in c o n s is te n t w ith the s t a b i l i t y |
I in the r e l a t i o n s them selves, the s t a b i l i t y th a t the abso-
' lu te income h y p o th esis im p lie s . R eferrin g to the perma-
j nent income hypotheses, he says: I
! This e l a s t i c i t y measures the v arian ce of measured
income a t t r i b u t a b l e to v a r ia tio n in the permanent \
component: the higher the e l a s t i c i t y , the sm aller \
i the im portance of t r a n s i t o r y f a c t o r s r e l a t i v e to
permanent f a c t o r s in producing income d iffe re n c e s
in the group co n sid ered , and co n v e rsely .
3. Savings and Age.
Measured income might be expected to be le s s than
permanent income in the e a rly and l a t e y ears of a working ;
l
; l i f e t i m e , and the o p p o site in the middle y e a rs . According
to the permanent income h y p o th e sis, th e r e f o r e , one would
expect a clo se c o r r e la tio n between r a t i o of permanent
14 I
income to measured income of groups c l a s s i f i e d by the age
of the spending u n it head and the r a t i o s of measured ,
i
saving to measured income. W e should also expect a r e - 1
verse r e la tio n s h i p between the r a t i o of permanent to
measured income and the r a t i o of measured consumption to
measured income. To some e x te n t, Friedman*s fin d in g s lend
support to t h i s e x p e c ta tio n .2
Support from T im e-Series Data
1 Friedman g iv es a g ra p h ic a l p r e s e n ta tio n of the per
i i
j c a p ita p erso n al consumption ex p en d itu res in the United [
I i
! S ta te s and the per c a p ita p erso n al d isp o sa b le income, both 1
I q
j in c o n s ta n t p ric e s fo r the period 1897-1949. He shows
I
th a t the observed p o in ts l i e on the c e n tr a l l i n e . They
!
seem to have been g en erated by the a d d itio n of t r a n s i t o r y j
components both of income and consumption. This i s , of j
co u rse, a r e s u l t which one would expect according to the j
permanent income h y p o th esis i f the determ ining f a c t o r s !
(k) were roughly c o n s ta n t, or o f f s e t t i n g , fo r the p e rio d .
In another ta b u la r p r e s e n ta tio n , Friedman sum-
j m arizes some of the consumption income r e l a t i o n s computed
fo r the United S ta te s by Goldsmith and by F e rb e r.4 The !
2I b i d . , p. 91.
3I b i d . , p. 117.
4I b id ., Table 12, p. 126.
15
m arginal p ro p en sity to consume i s le s s than the average
p ro p e n sity to consume fo r every r e l a t i o n in the Table,
and the income e l a s t i c i t y of consumption i s le s s than
u n ity . T herefore, the computed fu n c tio n s , he concludes,
cannot be regarded as s ta b le r e l a t i o n s between consumption
i
and income.
TEST 2
CONSUMPTION PATTERNS AND PERMANENT INCOME
The two t e s t s in the paper by Friend and Kravis^
are based on data from the Bureau of Labor S t a t i s t i c s ,
Survey of Consumer E x p en d itu res. Both t e s t s attem pted to
j estim a te the constancy of the consumption to permanent
i
income r a t i o .
They grouped data as c o n s ta n t and nonconstant
income fa m ilie s and c a lc u la te d consumption to measured
income r a t i o s fo r each income b ra c k e t.
Fam ilies w ith r e l a t i v e l y c o n s ta n t incomes were
defined as w ith about the same income in 1950 as in 1949,
who would th e re fo re a n t ic i p a te about the same income in
1951.
i
j Since consumer u n its w ith r e l a t i v e l y c o n stan t
I income are presumably c lo s e r to t h e i r ’'perm anent1 ' income,
^Irw in Friend and Irv in g B. K ravis, "Consumption
P a tte rn s and Permanent Income," The American Economic
Review, XLVII (May, 1957), pp. 536-555.
the au th o rs expected to fin d r a th e r c o n sta n t consumption-
income r a t i o s fo r d i f f e r e n t income groups of c o n s ta n t-
income f a m ilie s . They a lso expected to see a tendency fo r
consumption-income r a t i o s of c o n s ta n t income f a m ilie s to
be hig h er than the corresponding r a t i o s of n o n -co n sta n t-
income f a m ilie s . The r e s u l t s , shown in Table 1, in d ic a te
th a t constant-incom e fa m ilie s have about the same d i f f e r ­
ences in consumption-income r a t i o s in middle and upper
income groups as non-constant-incom e f a m ilie s . The data
also show a tendency fo r the consumption-income r a t i o s of
constant-incom e fa m ilie s in upper income groups to be |
lower than the corresponding r a t i o s of non-constant-incom e j
fa m ilie s in th ese groups. This c o n f l i c t s w ith the assump- ' ■
i
tio n t h a t the t r a n s i t o r y component of income w ill not be
consumed.
To sum up, the range of v a r ia tio n in consumption-
income r a t i o s i s sm aller fo r constant-incom e groups than
fo r those w ith v a ria b le incomes. The au th o rs o f the study
considered the r e s u l t s very d i f f i c u l t to re c o n c ile w ith
the assumption th a t the r i c h and poor consume the same
p ro p o rtio n of t h e i r permanent incomes.
Table 2 shows t h a t c u rr e n t consumption-income
r a t i o s of d i f f e r e n t o ccu p atio n al groups are c lo s e ly c o r­
r e l a t e d w ith the average incomes of th ese groups. The
c o e f f i c i e n t of rank c o r r e la tio n i s 0 .8 1 . Since fo r each
Table 1
CONSUMPTION-INCOME RATIOS BY INCOM E CLASS FOR ALL URBAN CONSTANT
AND NONCONSTANT INCOM E FAMILIES, UNITED STATES, 1950
Income a f te r Taxes
(Dollars)
Sample
Frequency
D istrib u tio n
of Families
(Percent)
Average
Income
(After Tax)
(Dollars)
Consumption-income
Ratio
Including Excluding
Durables Durables
Constant Income Families
Under 1,000 352 15.00 640 1.531 1.462
1,000-1,999 547 18.72 1,482 1.065 1.006
2,000-2,999 632 16.42 2,519 1.027 .932
3,000-3,999 680 15.36 3,477 .994 .878
4,000-4,999 460 12.18 4,464 .961 .835
5,000-5,999 282 8.08 5,430 .941 .820
6,000-7,499 177 6.25 6,693 .883 .766
7,500-9,999 97 4.66 8,370 .811 .700
10,000 and over 67 3.33 17,220 .637 .568
Total 3,294 100.00 3,685 .919 .816
Nonconstant Income
Under 1,000
Families
419 6.66 606 2.513 2.330
1,000-1,999 983 12.54 1,552 1.212 1.124
2,000-2,999 1,713 16.58 2,534 1.089 .978
3,000-3,999 2,305 19.40 3,493 1.035 .905
4,000-4,999 1,654 16.32 4,461
5,456
1.005 .866
5,000-5,999 931 9.96 969 .826
6,000-7,499 627 8.28 6,617 924 .785 ^
Table 1 (Continued)
Income a f te r Taxes
(Dollars
Sample
Frequency
D istrib u tio n
of Families
(Percent)
Average
Income
(After Tax)
(Dollars)
Consumption-income
Ratio
Including Excluding
Durables Durables
7,500-999 333 5.98 8,459 .857 .741
10 ,000 and over 230 4.28 15,308 .687 .601
Total 9,195 100.00 4,312 .961 .838
A ll Families
Under 1,000 771 8.93 614 2.081 1.922
1,000-1,999 1,530 14.22 1,532 1.154 1.083
2 ,000-2,999 2,345 16.53 2,534 1.073 .966
3 ,000-3,999 2,985 18.30 3,487 1.024 .899
4 ,000-4,999 2,114 15.20 4,462 .997 .859
5 ,000-5,999 1,213 9.45 5,449 .965 .824
6 ,000-7,499 804 7.73 6,618 .913 .781
7 ,500-9,999 430 5.62 8,434 .843 .732
10 ,000 and over 297 4.02 15,914 .677 .593
Total 12,489 100.00 4,147 .950 .832
Source: Irwin Friend and Irving B. Kravis, "Consumption P attern s and Permanent Income," |
The American Economic Review, XLVII (May, 1957), p. 545. ;
t-* i
00 I
19
Table 2
CONSUMPTION-INCOME RATIOS BY OCCUPATION
URBAN UNITED STATES, 1950
Occupation
Sample
Frequency
Average
Income
(A fter Tax)
(D ollars)
Consumption-
Income
R atio
S a la rie d O f f i c i a l s and
Managers 763 5,992 .930
Self-Employed 1,197 5,428 .891
S a la rie d P ro fe s s io n a ls
and T echnicals 960 5,941 .918
Sales 663 4,739 .982
Craftsmen 2,254 4,194 .996
C l e r ic a l 1,022 3,682 .988
O peratives 2,063 3,662 .997
Other S ervice Workers 860 3,052 1.010
Laborers 807 2,968 1.003
Not G a in fu lly Employed 1,674 2,246 1.078
P riv a te Household
Workers 226 1,492 .989
T otal 12,489 4,147 .950
Source: Irw in Friend and Irv in g B. K ravis, “Consumption
P a tte rn s and Permanent Incom e,” The American
Economic Review, XLVII (May, 1957), p. 546.
20 |
occupation average income can be regarded as a good i n d i ­
c a to r of permanent income, t h i s t e s t also r a i s e s some
doubt about the constancy of the consumption-income r a t i o
fo r d i f f e r e n t permanent income c l a s s e s .
TEST 3
THE PERMANENT INCOME HYPOTHESIS
|
| The data in Houthakker*s study was derived from
, the budget survey which the U. S. Bureau of Labor S ta-
i
i t i s t i c s c a rr ie d out in 1950.6 Houthakker te s te d the
assumption th a t the m arginal p ro p e n sity to consume out of
t r a n s i t o r y income i s zero and he a lso attem pted to ex p lain
the r e la tio n s h i p found by Friedman between measured con-
; sumption and measured income. (
Friedman found the e l a s t i c i t y of measured con- 1
l
sumption w ith r e s p e c t to measured income to be equal to
the p ro p o rtio n of t o t a l income t h a t i s accounted fo r by
permanent income. Houthakker reasoned th a t i f one com- i
putes a re g re s s io n fo r s t e e l workers only, the e l a s t i c i t y j
should be le s s than fo r the p o p u la tio n as a whole because J
i
th e re i s le s s v a r i a t i o n in permanent income among s t e e l 1
workers than among people from a l l occupations combined.
^H. S. Houthakker, "The Permanent Income Hypoth-
e s i s , " The American Economic Review. XLVIII (June, 1958),
pp. 396-404.
21
The data in Table 3 were c l a s s i f i e d by c i t y c l a s s ,
occu p atio n , and age of the head of the household. For
each c e l l in Table 3, two re g re s s io n s of consumption on
income were computed, one l i n e a r (c o n sta n t m arginal pro-
pensity-to-consum e) and the o th e r d o u b le -lo g a rith m ic
(c o n sta n t e l a s t i c i t y of consumption w ith re s p e c t to in -
I
| come).
The Table shows t h a t only one o ccupation— the s e l f
employed—has a m arginal p ro p e n sity to consume sm aller
than th a t found fo r the sample as a whole (0 .6 5 8 ). A
s im ila r check fo r the e l a s t i c i t i e s shows th a t only two
occupations have a sm aller e l a s t i c i t y than the sample.
F in a lly , only 15 of the 36 m arginal p r o p e n s itie s and
l e l a s t i c i t i e s in the c r o s s - c l a s s i f i c a t i o n by age and c i t y
c la s s are sm aller than the corresponding m arginal pro­
p e n s i t i e s and e l a s t i c i t i e s fo r t h e i r c i t y c la s s group.
Consequently, the m arginal p ro p en sity to consume
out of t r a n s i t o r y income appears g r e a te r than th a t out of
permanent income, ( i t should be noted t h a t consumption
fig u re s have included purchases of consumer d u ra b le s .)
1 TEST 4 I
WINDFALL INCOME AND CONSUMPTION7
i
The N ational S ervice L ife Insurance dividends paid ;
7Ronald Bodkin, ‘'W indfall Income and Consumption,"
The American Economic Review, XLIX (September, 1959;,
pp. 60£-6l5.
Table 3
MARGINAL PROPENSITY TO CONSUM E (UPPER FIGURES) AND INCOM E ELASTICITY
(LOW ER FIGURES) BY CITY CLASS, OCCUPATION, AND AGE OF HEAD
UNITED STATES URBAN CONSUMERS, 1950
Occupation
City Class
North South West
c c c
c d ( D C D
X I ja X }
0 > H rH
C D N .H C D H rH
C J 1 3 rH cn 3 i —I
cn 3 < — 1
H X I < 0 N X J C O N X I c o
< 0 3 e C D 3 £ C D 3 e
-1 C O co -J co co C O co
All
Age of Head
•tf ^ r ■ sr
C O
■sr in X)
1 i i i
in i n in in
C M 00 s r in
Self-Employed .438
.527
.648
.692
.562
.463
.512
.565
.535
.576
Salaried Pro­
fe ssio n a ls
O f f ic ia ls , e tc .
.591
.744
.863
.852
.622
.757
.743
.797
.507
.643
C le ric a l .724
.754
.818
.813
.812
.922
.773
.779
.875
.749
S k ille d Workers .768
.740
.613
.598
.639
.692
.919
.875
.661
.758
Sem i-skilled
Wage Earners
.834
.833
.796
..704
.983
.888
.808
.840
.942
.928
Unskilled Wage
Earners
.841
.721
.828
.846
1.080
1.049
.890
.911
1.020
.903
822
537
.582
.464
.424
.386
.437
.469
.505
.523
.391
.304
.595
.588
.421
.436
.549
.645
795
836
.623
.741
.587
.727
.678
.812
.650
.770
.703
.756
.631
.733
.742
.796
.580
.800
430
439
.790
.743
.701
.249
.418
.489
.758
.726
.808
.836
.714
.698
.778
.665
.732
.723
787
663
.910
.572
.891
.877
.909
.895
.762
.740
.780
.788
.794
.714
.747
.809
.746
.646
612
783
.876
.796
.760
.755
.754
.752
.827
.815
.713
.753
.883
.868
.822
.822
.895
.792
869
890
.817
.805
.914
.591
.943
.796
.874
.816
.914
.960
.870
.814
.854
.787
.869
.784
to
Table 3 (Continued)
Occupation
C ity Class
All
Age of Head
North South West
25-34
35-44
45-54
55-64
Large
Suburban
Small
Large
Suburban
Small
Large
Suburban
Small
Not G ainfully .834 .686 .905 .827 .738 1.059 .639 .816 .630 .773 .981 .713 .767 .761
Employed .571 .546 .457 .659 .845 .964 .541 .465 .288 .530 .651 .765 .503 .503
A ll .596 .732 .667 .759 .637 .824 .696 .600 .557 .658 .713 .669 .617 .663
.679 .628 .792 .792 .775 .801 .682 .553 .557 .696 .740 .744 .669 .656
Age
25-34 .695 .634 .576 .762 .817 .644 .797 .878 .570 .713
.720 .675 .689 .859 .869 .830 .615 .683 .717 .740
35-44 .647 .725 .780 .792 .607 .941 .689 .481 .470 .669
.791 .811 .841 .817 .748 .575 .640 .591 .599 .744
45-54 .506 .847 .693 .690 .568 .896 .745 .629 .651 .617
.585 .816 .723 .728 .762 .885 .689 .493 .539 .669
55-64 .715 .624 .540 .847 .698 .695 .606 .780 .544 .667
.677 .648 .484 .797 .706 .856 .699 .469 .494 .656
; Source: H. S. Houthakker, M The Permanent Income H ypothesis,M The American Economic k>
J Review, XLVIII (June, 1958), p. 4G4. w
24
out in 1950 to v e te ra n s . The h y p o th esis was te s te d th a t
consumption and t r a n s i t o r y income are u n c o rre la te d . As
explained b e fo re , t h i s follow s from the assumption th a t
! V vt = ° ‘
Bodkin pointed out th a t th e re was no reason fo r
v e te ra n s to expect t h i s dividend payment; th e r e f o r e , the
d iv id e n d s, which amounted to $2.8 b i l l i o n s , could be con­
sid e re d a w in d f a ll, or t r a n s i t o r y income, and could be
used to t e s t the h y p o th e sis th a t t h i s w in d fa ll income and
consumption were u n c o rre la te d . Bodkin used m u ltip le r e -
j g re s s io n a n a ly s is and computed two r e g r e s s io n s , one of
| which included consumer d u rab les and the o th e r which ex-
I eluded them.
i
The eq u atio n s are as fo llo w s:
( in c lu s iv e of con- c^ = 964 + .747 y + .966 d, R = 601
sumer d u rab les)
(Exclusive of con- C2 - 959 + .560 y + .723 d, R = 601
! sumer d u rables)
where (cx) and ( 0 2 ) stand fo r t o t a l consumption, (y) i s
fam ily income a f t e r tax es and not in c lu d in g the v a ria b le
(d ), and (d) stan d s fo r the w in d fa ll income.
! As seen from the e q u a tio n s, the m arginal propen-
i
i s i t y to consume out of w in d fa ll income would be between
0.72 and 0 .9 7 .
25
Friedman argues th a t the r e g re s s io n c o e f f i c i e n t
(th e m arginal p ro p e n sity to consume out of t h i s
t r a n s i t o r y income) should be sm all, about 0 .3
or so. He a r r iv e s a t t h i s t h e o r e t i c a l p r e d ic ­
tio n in the follow ing manner. From em p irical
d a ta , Friedman e stim a te s t h a t the time horizon
of in d iv id u a l household u n i t s , in the r e a l
(u n c e rta in ) w orld, i s approxim ately th re e y e a rs .
Because of t h i s , approxim ately o n e -th ird of the
w in d fa ll w i l l e n te r the u n i t ’ s permanent income
stream . Thus, the average p ro p e n sity to con­
sume out of permanent income (which has been
found to be roughly .9) m u ltip lie d by o n e -th ird
the dividend w i l l give an estim ated M PC out of
dividend income of 0 .3 .8
The m arginal p ro p e n sity to consume which has been
| estim ated to be between 0 .72 and 0.97 i s much h igher than
0 .3 . This high tendency to spend w in d fa ll income i s ,
j th e r e f o r e , a t v aria n ce w ith the permanent income hypoth-
! e s i s . Bodkin, consequently, concludes t h a t consumption
and w in d fa ll income are not u n c o rre la te d .
TEST 5
WINDFALL INCOME AND CONSUMPTION9
The I s r a e l i Survey o f Family Savings of 1957-58.
This survey c o lle c te d d ata which showed the behavior of
r e c i p i e n t s of p erso n al r e s t i t u t i o n payments from Germany.
As in Bodkin’ s study, the h y p o th esis was te s te d th a t con­
sumption and t r a n s i t o r y income are u n c o rre la te d .
8I b id . , pp. 605-606.
9m. E. K re in in , "W indfall Income and Consumption,"
The American Economic Review, LI (June, 1961), pp. 388-
390.
26
The r e s t i t u t i o n payments were regarded as t r a n s i ­
to ry or w in d fa ll income. The behavior of spending u n its
re c e iv in g such payments was compared to t h a t of non­
r e c i p i e n t s belonging to the same socio-economic group.
The r e g re s s io n equation was as follow s:
c = 397 + .857 y + .167 r , R = .769
j where (c) i s t o t a l consumption in c lu d in g ex p en d itu res for
| d urable goods, (y) i s d isp o sab le income ex c lu siv e of r e s -
i
| t i t u t i o n payments, and (r) i s r e s t i t u t i o n payments. The
m arginal p ro p e n sity to consume out of w in d fa ll income i s
.167, which i s approxim ately o n e - f i f t h of the m arginal
p ro p en sity to consume c u rr e n t income. When durable goods
are excluded from consumption, the m arginal p ro p en sity to
1 consume w in d fa ll income becomes 0.156.
t According to the a u th o r’ s i n t e r p r e t a t i o n , the
sm allness of the c o e f f i c i e n t s supports the permanent i n ­
come h y p o th e sis. He a t t r i b u t e s the d if f e r e n c e s between
h is r e s u l t s and those of Bodkin by the r e l a t i v e s iz e of
the r e p a ra tio n payments in I s r a e l . These payments were
la r g e r r e l a t i v e to c u r r e n t income than the veterans*
in su ran ce payments in the United S ta te s .
On the o th e r hand, Bodkin, in h is comment on
K re in in ’ s s t u d y , ^ c a lle d a t t e n t i o n to the fo re ig n ex-
I change r e g u la tio n s in I s r a e l , which provided a powerful
iOlbid., pp. 445-447
27
in c e n tiv e fo r the r e c i p i e n t s not to spend t h e i r r e c e i p t s
bu t to hold them in liq u id fo re ig n exchange a s s e t s . He
a lso argued th a t the r e s t i t u t i o n payments in I s r a e l could
not be regarded as unexpected, t r a n s i t o r y income because
the debate in German P arliam ent enabled the I s r a e l i
r e c i p i e n t s to a n t i c i p a t e the payments in advance.
TEST 6
THE PROPENSITY TO CONSUME PERMANENT INCOME11
Thomas Mayer*s a n a ly s is included a l l budget
s tu d ie s sin ce 1900 which provided d ata according to
occu p atio n s, except the follow ing: (1) fo r underdeveloped
1 and Communist c o u n trie s , (2) fo r the immediate post-W orld
i War I I y e a rs , (3) fo r le s s than 12 months p e rio d s , (4)
fo r a r i s i n g m arginal p r o p e n s itie s to consume of measured
income.
This t e s t co n s iste d of two p a r t s : f i r s t , he con­
sid e re d the h y p o th esis t h a t the average p ro p e n sity to
consume i s independent of the le v e l of permanent income;
second, he te s te d the p ro p o s itio n t h a t the m arginal p ro ­
p e n s ity to consume would be g r e a te r fo r permanent income
; than fo r measured income (which he c a lle d a t e s t of the
j ‘‘lo o se r v ersio n " of the permanent income h y p o th e s is ) . The
i
11Thomas Mayer, "The P ro p e n sity to Consume Perma­
nent Income," The American Economic Review, LVI (December,
1966), pp. 115S=TT77.-------------------------------------
28
consumption f ig u re s included purchases of consumer d u r­
a b le s , and the mean income of occu p atio n al groups was
taken as a proxy fo r permanent income.
In te s tin g the f i r s t h y p o th e sis, Mayer compared
average p r o p e n s itie s to consume fo r d i f f e r e n t o ccu p atio n s.
Then, in order to t e s t not only "the lo o se r v ersio n " but
a lso to determ ine the v a l i d i t y of the b a sic th e o ry , he
used a method which he d e s c rib e s as fo llo w s:
This procedure c o n s is ts of computing the
m arginal p ro p e n sity to consume tw ic e, once
from households grouped by occupation, and
once from the same households grouped by i n ­
come c la s s ( i . e . , by measured income). I f
the permanent income theory i s e n t i r e l y c o r­
r e c t , then th e m arginal p ro p e n sity to consume,
when computed from the o ccu p atio n al grouping,
should on the average equal the average pro­
p e n s ity to consume. On the o th e r hand, assume
t h a t the permanent income theory i s com pletely
wrong, and th a t i t makes no d if fe re n c e whether
one uses permanent income or measured income
in e stim a tin g the consumption f u n c tio n . I f
so, the m arginal p ro p en sity to consume should,
on the average, be the same when households
are c l a s s i f i e d by measured and by permanent
incom e.12
For num erical r e s u l t s , he uses the s t a t i s t i c
C
-----------, where (cQ) i s the m arginal p ro p e n sity to consume
Y
permanent income, (Cy) i s the m arginal p ro p e n sity to con­
sume measured income, and (a) i s the average p ro p e n sity to
consume. I f the permanent income h y p o th esis i s c o r r e c t ,
■ l^ Ib id . , pp. 1159-1160.
29
the numerator (c0 - a ) — th e re fo re the value of the f r a c -
tio n --s h o u ld be zero . I f the theory i s wrong, the value
! of the f r a c t i o n should approach u n ity . In any c a se , i t s
j value should vary between zero and u n ity .
I
j Mayer used simple consumption fu n c tio n s to compute
the m arginal p ro p e n sity to consume. In order to g e t
occupations w ith c l e a r - c u t income d if f e r e n c e s , he lim ite d
h is a n a ly s is to manual workers and w hite c o l l a r w orkers.
The r e s u l t s were summarized in a ta b le of the
a r t i c l e , ^ which showed the c o e f f i c i e n t s of rank c o r r e l a ­
tio n between the mean income fo r the occupation, the
average p ro p e n sity to consume, and the p re d ic tio n c o e f­
f i c i e n t s . On the b a s is of h is f in d in g s , he r e je c te d the
; permanent income h y p o th esis and concluded th a t g e n e ra lly
i
i conventional th e o rie s ( i . e . , the a b so lu te and r e l a t i v e
income th e o rie s ) seemed to provide more r e l i a b l e p re d ic ­
t io n s . N onetheless, he added,
I . . . [ th e ] success of the co nventional th e o rie s
! i s a sev erely q u a l if i e d one, sin ce i t appears
I th a t the m arginal p ro p e n sity to consume permanent
income i s g r e a te r than the m arginal p ro p en sity to
consume measured income. As p re v io u sly pointed
o u t, in t h i s case the p r e d ic tio n c o e f f i c i e n t i s
le s s than u n ity . And t h i s i s tr u e fo r the g re a t
m a jo rity of the c o e f f i c i e n t s shown in Table 1.14
13I b i d . , pp. 1164-1166.
14I b i d . , p. 1168.
Since on the b a s is of th e data he had to r e j e c t
both the permanent income h y p o th esis and the conventional
1 th e o r ie s , the author computed a s e t of c o e f f ic ie n ts fo r
p r e d ic tio n purposes. In a l l c a se s , the medians and the
p o s it io n a l means of the c o e f f i c i e n t s were 0 .6 . Since the
average value of the p r e d ic tio n c o e f f i c i e n t s was c lo s e r
to u n ity than to zero, Mayer concluded th a t the conven­
t io n a l th e o r ie s would serve b e t t e r than the permanent
income theory in p re d ic tin g the p ro p o rtio n of income
I
consumed.
i
CHAPTER I I I
INTERNATIONAL TIME-SERIES ANALYSIS
As seen from the preceding c h a p te r, a l l of the
previous t e s t s , except Friedman*s own t e s t , which examined
| the im p lic a tio n s of the permanent income h y p o th e sis, used
| c r o s s - s e c tio n a l d a ta .
In the fo llo w in g , we w ill t e s t the h ypothesis by
using tim e - s e r ie s d ata fo r se v e ra l c o u n tr ie s .
DATA. PROCEDURE. AND SAMPLE
The data on aggregate p r iv a te consumption, govern-
i ment spending, and g ro ss n a tio n a l product in terms of
i
j ex p en d itu res are in n a tio n a l currency u n its obtained from
The Yearbook o f N atio n al Account S t a t i s t i c s .^ Since the
t e s t only used the r a t i o s of aggregate income, consump-
■ l
j tio n , and so f o r t h , the problem of exchange com p arab ility
was avoided. Since we were only i n t e r e s t e d in r a t i o s , we
could also employ c u rre n t market p r i c e s . C onstant p ric e
data fo r the GNP was only used when c o u n trie s were grouped
according to the r a t e of growth. I n t e r e s t r a t e s were
^United N atio n s, Yearbook of N ational Account
S t a t i s t i c s . 1965 (New York, 1966).
31
deriv ed from the I n te r n a ti o n a l F in a n c ia l S t a t i s t i c s . ^
The sample c o n s is ts of seventeen c o u n tr ie s . These
c o u n trie s were se p arated in to th re e groups as fo llo w s:
Group A -l (Tables 1 -8 ):
Rapidly growing poor c o u n trie s w ith d e c lin in g
p r iv a te consumption to measured income r a t i o s (A u s tria ,
Taiwan, Greece, I s r a e l , Korea, Peru, Spain, and Yugo­
s la v ia ) .
Group A -II (Tables 9 -12):
Rapidly growing poor c o u n trie s w ith c o n sta n t
p r iv a te consumption to measured income r a t i o s (Dominican
R epublic, Guatemala, Mexico, and N icaragua).
Group B (Tables 13-17):
Rapidly growing r i c h c o u n trie s w ith d e c lin in g
p r iv a te consumption to measured income r a t i o s (France,
I t a l y , Japan, Sweden, and S w itz e rla n d ).
CALCULATION OF THE PERMANENT INCOME: THE TEST
The tim e - s e r ie s fo r permanent income was c a lc u ­
la te d as the weighted average of the income fig u r e s fo r
th re e co n secu tiv e y e a rs , the l a s t year*s income having
^ I n te r n a tio n a l Monetary Fund, I n te r n a ti o n a l
F in a n c ia l S t a t i s t i c s . X III (July 1960) and XX (May 1967).
33
twice the w eight of the preceding two y e a r s . Friedman
j h im self used a w eighting p a tte r n t h a t gave most w eight to
! c u rre n t income and su c ce ssiv e ly d e c lin in g w eights to
I
e a r l i e r incomes.
According to Friedman’ s permanent income hypoth­
e s i s , a ra p id r a t e of r i s e in income may or may not give
r i s e to a d e c lin in g r a t i o of consumption to measured i n ­
come. I f the r i s e in income r e f l e c t s development financed
p rim a rily from domestic c a p i t a l , the r e s u lt in g high r a t e
of r e tu r n to savings may be o f f s e t , and the r a t i o of con­
sumption to measured income may not r i s e . On the o th er
hand, i f the r i s e in income r e f l e c t s development financed
i
: p rim a rily from e x te rn a l a id , Friedman would expect the
i r a t i o of consumption to measured income to r i s e .
In order to t e s t the above h y p o th e sis, r a p id ly
growing c o u n trie s were se p arate d in to two groups, r ic h and
poor c o u n tr ie s . In g e n e ra l, in our sample of poor coun­
t r i e s , development was financed p rim a rily from fo re ig n
^ so u rces, whereas in the r ic h c o u n trie s of our sample,
development fin an c in g came almost e n t i r e l y from domestic
c a p i t a l .
These groups are as fo llo w s:
A. Poor C o u n tries
I . A u stria (Table 1)
Taiwan (Table 2)
34
Greece (Table 3)
I s r a e l (Table 4)
Korea (Table 5)
Peru (Table 6)
Spain (Table 7)
Yugoslavia (Table 8)
I I . Dominican Republic (Table 9)
Guatemala (Table 10)
Mexico (Table 11)
Nicaragua (Table 12)
B. Rich C ountries
France (Table 13)
I t a l y (Table 14)
Japan (Table 15)
Sweden (Table 16)
S w itzerland (Table 17)
On the b a s is of the permanent income h y p o th e sis,
in the poor c o u n trie s of Group A, the r a t i o of consumption
to measured income should r i s e as income in c re a se d . Since
in th ese c o u n trie s , as mentioned b e fo re , economic develop­
ment had been financed mainly from e x te rn a l a id , and
consumption should r i s e w ith permanent income w ith l i t t l e
or no o f f s e t , leading to an in c re a sin g r a t i o of consump­
tio n to measured income.
35
As seen from Tables 1 to 12, the fin d in g s on the
r a t i o o f consumption to measured income in Group A-I
j c o u n trie s are d i f f e r e n t from those in Group A -II c o u n tr ie s ,
i In the former group of c o u n trie s , the r a t i o of consumption
to measured income d e c lin e s , w hile the r a t i o i s ap p ro x i­
m ately c o n sta n t in the c o u n trie s of the second group.
Although the consumption to measured income r a t i o in
Group A -II c o u n trie s could be re c o n c ile d w ith the perma­
nent income h y p o th e sis, the d e c lin in g r a t i o in Group A-I
c o u n trie s i s , of co u rse, the ex act o p p o site of the p r e d ic ­
tio n based on the h y p o th e sis.
In c o u n trie s of Group B, the r a t i o of consumption
to measured income i s expected to d e c lin e sin ce in these
c o u n trie s economic development had been financed from
domestic c a p i t a l , and the r e s u lt in g high r a t e of r e tu r n j
to savings i s supposed to o f f s e t the e f f e c t of an in - |
c reasin g r a t i o of permanent to measured income. i
The fin d in g s fo r t h i s group of c o u n trie s are not |
I
a t v aria n ce w ith the e x p e c ta tio n based on permanent income ;
i
h y p o th e sis. As seen from Tables 13 to 17, the r a t i o of i
consumption to measured income in Group B d e c lin e s as
income r i s e s .
i
However, the r a t i o of government spending to meas­
ured income must be also taken in to c o n s id e ra tio n . !
Assuming th a t ex p o rts and im ports (according to the
i d e n t i t y , Y=C+G + I+ E-M) are in balance over tim e,
and n eg le ctin g investm ent (sin c e investm ent i s equal to
saving in the ex p o st se n se ), the r a t i o of consumption to !
measured income and the r a t i o of government spending to
measured income i s in v e rs e ly r e l a t e d . Any in c re a se (or
decrease) in (G) r e l a t i v e to (Y) would imply a f a l l (or a
r i s e ) in the r a t i o of (C) to (Y). T h erefo re, changes in
the consumption to measured income r a t i o s could p o ssib ly
be explained by the changes in the government spending to '
measured income r a t i o s . Hence, the above r e s u l t s must be
re-examined taking in to account also government spending. ^
In Group A-I c o u n tr ie s —w ith the exception of Peru 1
where the r a t i o of government spending to measured income
ro s e , w hile the r a t i o of consumption to measured income
d ec lin e d over the p e rio d 1950-1964— the r a t i o of govern- j
ment spending to measured income stay ed roughly co n sta n t |
as the consumption to measured income r a t i o d e c lin e d . 1
T herefore, the d e c lin e in the consumption to measured i n ­
come r a t i o in t h i s group cannot be a t t r i b u t e d to the
changes in the government spending to measured income
r a t i o . The case of Yugoslavia f u r th e r reduces the p re - ;
d ie tin g p o te n tia l of the permanent income h y p o th e sis. j
Yugoslavia fig u re s show th a t both the consumption and
I
government spending to measured income r a t i o s d e c lin e d .
Thus, the r a t i o of consumption to measured income
37
showed a g en e ra l tendency to d e c lin e w hile on the b a s is
of the h ypothesis i t would be expected to r i s e . I t was
j dem onstrated th a t t h i s d e c lin e cannot be a t t r i b u t e d to
changes in the government spending to measured income
r a t i o s . T h erefo re, in t h i s ca se, we must r e j e c t the
permanent income h y p o th e sis.
In c o u n trie s of Group A -II, although the r a t i o s of
consumption to measured income showed a d e c lin e (with the
; sin g le exception of the war to rn Dominican Republic where
I
| both the consumption and government spending to measured
j income r a t i o s rose) t h i s d ec lin e was very s l i g h t compared
i
J to those in the o th e r groups. The r a t i o of government
| spending to measured income in the c o u n trie s of t h i s group
was also v i r t u a l l y c o n s ta n t.
C onsidering Group B c o u n trie s , the government
spending to measured income r a t i o stayed roughly co n sta n t
in France (Table 13), Japan (Table 15), Sweden (Table 16),
and S w itzerland (Table 17) but rose in I t a l y (Table 14).
i As noted b e fo re , the r a t i o of consumption to measured
income d eclin e d in a l l c o u n trie s of t h i s group; hence,
except fo r the case of I t a l y , the d e c lin e in the consump­
tio n to measured income r a t i o cannot be a t t r i b u t e d to a
changing r a t i o of government spending to measured income.
As a r e s u l t , fin d in g s in t h i s group would seem to support
the permanent income h y p o th e sis. N onetheless, since the
38
r a t i o o f consum ption to m easured income showed a g e n e ra l
tendency to d e c lin e in c o u n tr ie s where i t was ex p ected to
in c re a s e (as in Group A - I ) , i t le a v e s us s k e p tic a l o f th e
g e n e ra l v a l i d i t y o f th e h y p o th e s is .
i
In sum, sin c e th e Group A -I c o u n tr ie s p ro v id e
stro n g ev id en ce a g a in s t th e perm anent income h y p o th e s is ,
w h ile b o th Groups A -II and B g iv e only weak s u p p o rt, we
need to c o n s id e r f u r t h e r th e e x p la n a tio n o f th e s e r e s u l t s .
To t h i s , we s h a ll now tu r n .
I RELATIONSHIP BETW EEN RATE OF INTEREST
| AND RATIO OF CONSUMPTION TO
i PERMANENT INCOME (1^
i
! A ccording to Friedm an*s own e x p la n a tio n , h is (k)
i
in th e e q u a tio n (C - k Yp) i s n o t a n u m erical c o n s ta n t fo r
each u n i t b u t a fu n c tio n o f v a r ia b le s o th e r th a n incom e.
I t s num erical v alu e co u ld change over tim e in re sp o n se to
changes in th e v a r ia b le s d eterm in in g ( k ) . For th e ag g re-
| g a t e , th e v alu e o f (k) could vary because o f changes in
j th e r e l a t i v e number o f u n i t s .
I
However, th e most im p o rta n t v a r ia b le s d eterm in in g
(k) a re th e r a t e o f i n t e r e s t , th e r a t i o o f non-human
w e a lth to expected income, and t a s t e . S ince th e l a s t two
v a r ia b le s could be assumed to rem ain c o n s ta n t in a p e rio d
as s h o r t as te n y e a r s , th e changes in (k) co u ld be tak en
to r e f l e c t th e changes in th e r a t e o f i n t e r e s t . A r i s e
in th e r a t e o f i n t e r e s t w i l l ten d to lower (k) and a f a l l
w i l l r a i s e i t .
The fo llo w in g i s a summary o f th e f in d in g s when
th e r a t e o f i n t e r e s t and (k) a re examined to g e th e r in
T ab les 1 through 17.
In Group A -I c o u n t r ie s , w ith th e e x c e p tio n of
I
Korea and P eru , th e r a t i o o f consum ption to perm anent in - (
come (k) and th e r a t e o f i n t e r e s t d id n o t show th e claim ed ■
r e l a t i o n s h i p . The r a t e o f i n t e r e s t and (k) b o th d e c lin e d ■
d uring th e p e rio d under c o n s id e r a tio n ; th e r e v e r s e of what
would be expected on th e b a s is o f th e perm anent income
h y p o th e s is . T his p ro v id e s f u r t h e r stro n g evidence a g a in s t
th e perm anent income h y p o th e s is . Not only do th e f ig u r e s
I
show t h a t th e re was an " o f f s e t " — i . e . , consum ption to
m easured income r a t i o s d e c lin e d in Group A -I c o u n tr ie s i
(which were a ls o la r g e r e c i p i e n t s o f f o re ig n a i d ) — b u t j
a ls o t h a t th e o f f s e t cannot be e x p la in e d as Friedman
th o u g h t most l i k e l y — nam ely, by means o f th e r a t e of
r e t u r n . !
| In Group A -II c o u n t r ie s , th e d a ta on th e r a t e o f <
i
i i n t e r e s t a re n o t a v a ila b le fo r th e Dominican R epublic and
I G uatem ala. In th e o th e r c o u n tr ie s o f Group A - I I , Mexico
and N icarag u a, th e r a t e o f i n t e r e s t rem ained c o n s ta n t, ,
i w h ile (k) d e c re a se d in Mexico and sta y e d c o n s ta n t in
I
N ica ra g u a. The form er r e s u l t i s evidence a g a in s t th e
40
perm anent income h y p o th e s is , w h ile th e l a t t e r p ro v id e s
some su p p o rt in i t s fa v o r . On b a la n c e , th e r e f o r e , t h i s
group may be n e g le c te d in th e o v e r a l l assessm en t of th e
i
j t e s t .
In c o u n tr ie s o f Group B, w ith th e e x c e p tio n s o f
Sweden and S w itz e rla n d , b o th th e r a t e of i n t e r e s t and (k)
showed a tendency to d e c lin e , a g a in th e r e v e r s e of th e
e x p e c ta tio n on th e b a s is of th e perm anent income hyp o th ­
e s i s . Only in Sweden and S w itz e rla n d d id th e r a t e o f
i
i n t e r e s t show an in c re a s e w h ile (k) d e c re a se d .
CONCLUSION
C o n sid erin g th e r e s u l t s of th e t e s t in view of
th e above a n a ly s is , Group A -I c o u n tr ie s p ro v id e stro n g
evidence a g a in s t th e perm anent income h y p o th e s is . S ince
th e fin d in g s in Group B c o u n tr ie s gave b u t weak su p p o rt
fo r th e h y p o th e sis in th e t e s t , which we had to r e j e c t
‘ in our f u r t h e r ex am in atio n of th e r e l a t i o n s h i p between
I th e r a t e o f i n t e r e s t and ( k ), i t can be concluded t h a t
th e r e s u l t o f t h i s stu d y , to g e th e r w ith th e m a jo rity of
th e r e s u l t s o f p re v io u s t e s t s , te n d s to r e f u t e th e p e r ­
manent income h y p o th e s is .
I t should be n o te d , however, th a t th e p r e s e n t
t e s t i s s u b je c t to th e l i m i t a t i o n o f our t i m e - s e r i e s ,
| sin c e d a ta f o r te n y e a rs m ight n o t be long enough to
i
!
I __________ _____________________________________________________________________________ _
41
produce a c c u ra te r e s u l t s . F u rth erm o re, allow ance should
be made f o r th e f a c t t h a t th e ex am ination o f th e r e l a t i o n
sh ip between th e r a t e o f i n t e r e s t and (k) has been based
on nom inal i n t e r e s t r a t e s alo n e and t h a t p o s s ib le v a r i ­
a tio n s in th e r a t e o f non-human w e a lth to ex p ected income
and in t a s t e have been n e g le c te d .
APPENDIX
Table 1
G R O U P A -I—AUSTRIA
Thousand M illio n S c h illin g
At C o n stan t
At 1 C u rre n t P r ic e s
P r ic e s o f
1954
Yp
Y C G Y ( r e a l )
Year
(1)
(2) (3) (4)
(5)
1950
1951
1952
1953 8 3 .0
1954 9 3 .2
1955 97.8 107.6 6 8 .2 13.3 103.6
1956 109.2 118.0 73.6 15.0 108.9
1957 121.8 130.8 79.3 17.8 115.3
1958 130.5 136.7 8 3.6 18.7 120.0
1959 138.5 143.3 8 8 .9 19.6 123.4
1960 150.6 161.3 96.6 20.8 133.7
1961 164.9 177.5 105.4 22.6 139.9
1962 178.0 186.7 115.4 2 4.3 142.1
1963 191.0 200.0 125.2 27.4 148.3
1964 206.5 219.8 133.7 30.7 157.2
Yp/Y C/Y G/Y
C/Yp r
T6) (7) (8) (97
(10)
Government C e n tra l Bank
Year
% % % % Bond Y ie ld s D iscount R ate
1950 67 12
1951
1952
1953 66 14
1954
1955 91 63 12 70 5 .00
1956 93 62 13 67 5.00
1957 93 61 14 65 5 .0 0
1958 95 61 14 64 5 .0 0
1959 97 62 14 64 4 .5 0
1960 93 60 13 64 5 .0 0
1961 93 59 13 14 5 .00
1962 95 62 13 65 5 .0 0
1963 96 63 14 66 4 .5 0
1964 94 61 14 65 4 .5 0
C = P r iv a te consum ption
G = Government spending
Y = G NP
Yp Permanent income
r = Rate o f in t e r e s t
44
Table 2
G R O U P A -1—CHINA
M illio n W. T. D o lla rs
At C u rre n t P r ic e s
At C o n stan t
P ric e s
Y
P Y
C G
Y ( r e a l )
Year
_ ( 1 ) (2) (3)
(4) (5)
1953 21,200
1954 23,154
1955
25,
031 27,885 19,985 4 ,7 9 2
1956 28, 908 32,297 23,032 6 ,1 3 2
1957 34, 038 37,886 26,994 7,125
1958 38, 395 41,650 28,818 8,296
1959 44, 246 48,675 33,436 9,798
1960 52, 545 59,929 40,688 10,856
1961 60, 318 66,334 44,763 11,976
1962 67, 753 72,375 48,896 12,722
1963 75, 801 82,248 53,029 14,044
1964 90, 206 103,071 67,197 16,393
Yp/*
C/Y G/Y C/Yp
r
(6) (7) (8) (9)
(10)
Government C e n tra l Bank
Year
*
% % %
Bond Y ie ld s D isco u n t Rate
1953 74 13
1954
1955 9© 72 17 80
1956 90 71 19 80 18.0
1957 90 71 19 79 18.0
1958 92 69 20 75 18.0
1959 91 69 20 76 18.0
1960 88 68 18 77 18.0
1961 91 67 18 74 1 6 .2
1962 94 68 18 72 15.8
1963 92 64 17 70 14.0
1964 88 65 16 74 14.0
C = P r iv a te consum ption
G = Government spending
Y = G NP
Yp = Permanent income
r = Rate o f in t e r e s t
45
Table 3
G R O U P A-I--GREECE
Thousand M illio n Drachmas
At C u rre n t P r ic e s At C o n stan t
P ric e s
Y
Year
(1)
(2)
(3)
(4)
(5)
1953 5 0 .3
1954 5 8 .7
1955 6 0 .5 66.6 5 1 .5 8 .0
1956 70.1 77.7 5 9 .9 9 .8
1957 77.9 8 3 .8 6 3 .9 10.4
1958 8 3 .7 86.8 6 6 .5 10.1
1959 8 7 .6 90.0 6 8 .7 10.9
1960 9 2 .7 97.0 73.8 11.5
1961 102.4 111.3 8 2 .3 12.2
1962 111.5 119.0 86.4 13.5
1963 124.0 132.9 96.6 15.1
1964 138.0 150.1 106.3 17.6
YpA
C/Y 3/Y C/Yp r
16) (7) (8) (9) (10)
Government C e n tra l Bank
Year
%
J L %
Bond Y ie ld s D iscount Rate
! 1950 83 13
1951
1952
1953 79 12
1954
1955 91 77 14 85 9.00
1956 90 77 13 85 9.00
1957 93 76 13 82 9.00
1958 96 76 12 79 9 .0 0 '
1959 97 76 12 78 9.00
1960 96 76 12 80 7.00
1961 92 74 11 80 6 .0 0
1962 94 73 11 77 6 .0 0
1963 93 73 9 78 5 .5 0
1964 92 71 12 77 5 .5 0
C = s P r iv a te consum ption
G = Government spending
Y = G N P
Yp = Permanent income
r = Rate o f in t e r e s t
1
Table 4
G R O U P A -1— ISRAEL
M illio n I s r a e l i Pounds
Year
At C u rre n t P ric e s
At C o n stan t
P r ic e s of
1955
Y ( r e a l )
(5)
YP
(1)
Y
(2)
C
(3)
G
(4)
1953 1,327
1954 1,754
1955 1,829 2,117 1,586 430 2,117
1956 2,228 2,526 1,882 677 2,312
1957 2,625 2,930 2,171 623 2,508
1958 3 ,042 3,357 2,475 677 2,695
1959 3,488 3,834 2,779 755 3,019
1960 3,950 4,311 3,097 837 3,279
1961 4,625 5,179 3,653 1,041 3,581
1962 5,460 6,176 4,385 1,401 4,010
1963 6,567 7,457 5,235 1,589 4,497
1964 7,594 8,572 6,051 1,791
/
4,965
Yp/Y C/Y G/Y C/Yp
r
(6) (7) (8) (9) (10)
Government C e n tr a l !
Year
%
JL J L
% Bond Y ie ld s D iscount
1950 75 20
1951
1952
1953 77 19
1954
1955 86 75 20 87 6 .0 0
1956 88 75 27 84 6 .0 0
1957 90 74 21 89 6 .0 0
1958 91 74 20 81 6 .0 0
1959 91 72 20 80 6 .0 0
1960 92 72 19 78 6 .0 0
1961 89 71 20 80 6 .0 0
1962 88 71 23 80 6 .0 0
1963 88 70 21 80 6 .0 0
1964 89 71 21 80 6 .0 0
C = P r iv a te consum ption Yp = Perm anent income
G - Government spending r = Rate o f in t e r e s t
Y = G NP
47
Table 5
G R O U P A -1— K O R E A
Thousand M illio n Won
At C o n stan t
At C u rre n t P ric e s
P r ic e s o f
I960
YP
Y C G
Y ( r e a l)
Year
(1)
(2) (3) (4) (5)
1953 4 1 .6 2
1954 59.72
1955 76.24 101.81 87.58* 10.10 178.30
1956 106.19 131.63 120.25* 13.88 180.67
1957 144.12 171.52 140.27* 21.35 193.60
1958 166.79 182.01 148.40* 26.15 205.45
1959 186.59 196.43 159.51* 30.85 214.90
1960 209.83 230.44 189.54 35.54 230.44
1961 244.17 274.92 220.32 40.06 241.26
1962 285.09 317.51 264.98 4 9 .6 2 248.91
1963 362.24 428«28 344.03 54.74 270.42
1964 484.73 596.58 484.06 61.95 292.08
Yp/Y C/Y G/Y C A p r
(6) (7) (8) (9) (10)
Government C e n tr a l Bank
Year
% % % %
Bond Y ie ld s D isco u n t Rate
1953 82 9
1954
1955 75 86 10 115 6 .5 7
1956 81 91 11 113 6 .5 7
1957 84 82 12 97 6.57
1958 92 82 14 89 6 .5 7
1959 95 81 16 86 7.30
1960 91 82 15 90 10.22
1961 89 80 15 90 10.22
1962 90 83 16 93 10.22
1963 85 80 13 95 10.22
1964 81 81 10 99 10.22
C = P r iv a te consum ption
G * Government spending
Y = GNP
Yp = Perm anent income
r = R ate o f i n t e r e s t
*These consum ption f ig u r e s were e s tim a te d as r e s i d u a l .
48
Table 6
G R O U P A -I— PERU
M illio n S o les
At 1960 P r ic e s
At C o n stan t
P ric e s
y
Y G G Y ( r e a l)
Year
(1)
(2) .. (3) (4)
(5)
1953 40,572
1954 42,192
1955 42,545 43,708 32,803 3,125
1956 43,709 44,469 33,524 3,168
1957 45,356 46,625 35,175 3,893
1958 46,294 47,042 35,435 3,928
1959 47,581 48,329 36,593 4,459
1960 50,959 54,233 37,308 5,383
1961 55,407 59,533 40,318 6,001
1962 60,348 63,813 43,057 6,379
1963 63,903 66,133 45,681 7,608
1964 67,316 69,659 46,036 8,955
Yp/Y C A G/Y C/Y
P 1
(6) (7) (8) (9) (10)
Government C e n tra l Bank
Year %
JL
% % B ondrY ields D iscount Rate
1950 79 7
1951
1952
1953 73 7
1954
1955 97 75 7 77 7 .8 2 6 .0 0
1956 98 75 7 77 7 .7 0 6 .0 0
1957 97 75 8 76 7.71 6 .0 0
1958 98 75 8 77 9.36 6 .0 0
1959 98 76 9 77 11.50 9.50
1960 94 69 10 73 9 .7 9 9.50
1961 93 68 10 73 8 .2 4 9.50
1962 95 67 10 71 7.66 9.50
1963 97 69 12 71 7.14 9.50
1964 97 66 13 68 7 .2 3 9.50
C = P r iv a te consum ption
G = Government spending
Y =
Yp = Permanent income
r = Rate o f in t e r e s t
49
Table 7
G R O U P A -1— SPAIN
Thousand M illio n P e s e ta s
 - —   ----------------------
! At C o n sta n t
_______At C u rre n t P r ic e s ________ P ric e s
Year
X P
(1)
Y
(2)
1954 337.3
1955 360,2 371.7
1956 392.6 431.1
1957 453,4 505.5
1958 521.5 574.7
1959 560.1 580.1
1960 596.3 615.2
1961 647.3 697.0
1962 725.8 795.5
1963 842.1 938.6
1964 965.0 1063.0
Yp/Y C/Y G/Y CAr
(6) (7) (8) ( 9)
Year % % . % %
1953 9
1954 75
1955 97 74 9 77
1956 91 74 9 81
1957 90 73 10 81
1958 91 74 8 82
1959 97 74 9 77
1960 97 72 9 74
1961 93 72 8 78
1962 91 69 8 76
1963 90 69 8 77
1964 91 70 8 77
C = P r iv a te consum ption
G = Government spending
Y = G NP
C
(3)
G
(4)
276.6 32.8
318,4 38.7
369.4 4 8 .1
425.4 4 6 .8
430.8 5 2 .5
4 4 3 .2 5 4 .6
503.8 52.4
550.1 6 5 .2
6 5 2 .2 77.4
742.4 83.0
r
Government C e n tr a l Bank
Bond Y ie ld s D isc o u n t R ate
No d a ta
I
Yp 5 5 Permanent income
r = Rate o f in t e r e s t
50
Table 8
G R O U P A -1—YUGOSLAVIA
Year
1953
1954
1955
1956
1957
1958
1959
1960
1962
1963
1964
Thousand M illio n D inar
At C u rre n t P ric e s
YP
ill
1,272
1,428
1,625
1,627
2,050
2,368
2,793
3,184
3,744
4,709
Y
i l l
1,022
1 , oyo
1,444
1,829
1,834
2,269
2,686
3,110
3,471
4 ,199
5,583
C
i n
G
812 237
864 242
1,028 258
1,096 277
1,269 319
1,492 381
1,755 456
1,950 500
2,305 540
2,960 633
At C o n stan t
P ric e s
Y ( r e a l)
( 5 ) ______
Vp/Y C/Y G/Y C/Yp
(6) (7) (8) (9)
Year
%
JL
% %
1953 59 21
1954
1955 91 58 17 64
1956 99 60 17 61
1957 89 56 14 63
1958 89 60 15 67
1959 90 56 14 62
1960 88 56 14 63
1961 90 56 15 63
1962 92 56 14 61
1963 89 55 13 62
1964 84 53 11 63
Government C e n tra l Bank
Bond Y ie ld s D isco u n t Rate
No d a ta
C = P r iv a te consum ption Yp = Permanent income
G = Government spending r = Rate o f i n t e r e s t
Table 9
G R O U P A -I I — DOM INICAN
51
M illio n Pesos
Year
1953
1954
1955
1956
1957
1959
1961
1962
1964
P A
( 6 )
At C u rre n t P r ic e s
At C o n stan t
P r ic e s o f
1960
Y ( r e a l)
(5)
Yp
(1)
Y
(2)
C
(3)
G
(4)
4 3 5 .3
474.0
477.4 5 00.2 351.7 66.7 501.7
519.3 551.6 381.0 79.6 546.1
565.9 605.9 403.0 9 4 .3 572.1
600.3 621.9 430.5 108.3 598.6
631.7 649.6 447.9 112.3 626.4
651.0 666.3 4 5 1 .2 105.9 666.3
655.6 653.4 4 6 3 .2 99.9 680.0
716.7 773.7 560.0 153.5 737.6
770.6 827.7 6 27.3 155.4 726.7
837.8 875.0 6 66.3 178.4 751.1
C/Y G/Y C/Yp
r
(7) (8) (9)
(10)
Year % % % %
1950 70
1951
1952
1953 73 13
1954
1955 95 70 13 74
1956 94 69 14 73
1957 93 67 16 71
1958 97
69 17 72
1959 97 69 17 71
1960 98 68 16 69
1961 100 71 15 71
1962 93 72 19 78
1963 93 76 19 81
1964 96 76 20 80
Government C e n tra l Bank
Bond Y ie ld s D iscount Rate
M o d a ta
C = P r iv a te consum ption
G = Government spending
Y = G NP
Yp = Permanent income
r = Rate o f in t e r e s t
Table 10
G R O U P A -11—G U A T E M A L A
M illio n Q u e tz a le s
l
At C o n stan t
At C u rre n t P ric e s
P r ic e s o f
1958
YP
Y C G
Y ( r e a l)
Year
(1) (2) (3)
(*)
(5)
1953 728.4
1954 774.5
1955 779.0 806.7 668.8 4 9 .2 8 02.3
1956 8 4 3 .2 895.9 719.3 57.1 8 76.9
1957 8 9 2 .2 933.2 7 5 5 .2 6 4 .3 925.1
1958 938.3 962.2 807.6 70.4 962.2
1959 965.6 983.6 826.8 78.4 1 ,0 0 9 .5
1960 991.5 1 ,0 1 0 .1 852.1 79.9 1 ,0 3 6 .6
1961 1 ,0 1 4 .3 1 ,0 3 1 .0 861.5 83.1 1 ,0 7 5 .2
1962 1 ,0 5 1 .9 1 ,0 8 3 .3 922.1 7 7 .2 1 ,1 0 3 .0
1963 1 ,1 3 0 .4 1 ,2 0 3 .8 1 ,0 2 5 .5 83.4 1 ,2 4 5 .8
1964 1 ,2 2 7 .1 1 ,3 1 0 .7 1 ,0 6 0 .5 89.6 1 ,3 1 7 .8
Yp/Y C A G/Y C A p
r
(6) (7) (8) (9) (10)
Government C e n tra l Bank
Year
% JL % %
Bond Y ie ld s D isco u n t Rate
1950 85 5 No d a ta
1951
1952
1953 84 7
1954
1955 97 83 6 86
1956 94 80 6 85
1957 96 81 7 85
1958 98 84 7 86
1959 98 84 8 86
1960 98 84 8 86
1961 98 84 8 85
1962 97 85 7 88
1963 94 85 7 91
1964 94 81 7 86
C = P r iv a te consum ption
G = Government spending
Y = G NP
Yp = Permanent income
r = Rate o f in t e r e s t
53
Table 11
GROUP A-11—MEXICO
Thousand M illio n Pesos
At C u rre n t P r ic e s
At C o n stan t
P ric e s
YP
Y C G >
{ ( r e a l)
Year
(1)
(2)
(3) (4) (5)
1953 58.4
1954 71.5
1955 76.1 8 7 .3 7 0.7 3 .8
1956 8 9 .3 99.3 7 9 .5 4 .4
1957 103.7 114.2 93.6 5 .2
1958 116.9 127.2 105.7 5 .9
1959 128.4 136.2 112.3 6 .2
1960 142.9 154.1 126.8 8 .0
1961 154.4 163.8 133.9 8 .6
1962 168.2 177.5 145.0 9 .6
1963 181.4 192.2 155.6 1 1 .2
1964 204.7 224.6 180.7 12.5
Yp/Y C/Y g/ y C/Yp
r
(6) (7) (8) (9) (10)
Government C e n tra l Bank
Year
% JL
% % Bond Y ie ld s D isco u n t Rate
1950 83 4
1951
1952
1953 83 4
1954
1955 87 81 4 93 4 .5 0
1956 90 80 4 89 4 .5 0
1957 91 82 5 90 4 .5 0
1958 92 83 5 90 4 .5 0
1959 94 82 5 87 4 .5 0
1960 93 82 5 89 4 .5 0
1961 94 82 5 87 4 .5 0
1962 95 82 5 86 4 .5 0
1963 94 81 6 86 4 .5 0
1964 91 81 6 88 4 .5 0
C = P r iv a te consum ption Yp = Perm anent income
G = Government spending r = Rate o f l n t e r e s t
Y = G N P
Table 12
G R O U P A -11—NICARAGUA
54
M illio n Cordobas
At 1958 P r ic e s At C o n stan t
Year
YP
(1)
Y
(2)
C
(3)
G
(4)
P ric e s
Y ( r e a l)
(5)
1953 1,953
1954 2,124
1955 2,160 2,282 1,172 187
1956 2,224 2,245 1,793 193
1957 2,335 2,408 1,942 202
1958 2,378 2,430 1,935 204
1959 2,438 2,458 1,739 200
1960 2,466 2,488 1,951 205
1961 2,561 2,650 2,086 220
1962 2,750 2,932 2,363 223
1963 2,972 3,153 2,357 249
1964 3,221 3,401 2,549 294
Yp/Y C/Y G/Y C/Yp
r
(6) (7) (8) (9) (10)
Government C e n tr a l Bank
Year
%
% JL
%
Bond Y ie ld s D iscount Rate
1953 76 8
1954
1955 95 78 8 79 6 .0 0
1956 99 80 9 81 6 .0 0
1957 97 81 8 83 6.00
1958 98 80 8 81 6 .0 0
1959 99 71 8 71 6 .0 0
1960 99 78 8 79 6 .0 0
1961 97 79 8 81 6 .0 0
1962 94 81 8 86 6 .0 0
1963 94 75 8 79 6 .0 0
1964 95 75 7 79 6 .0 0
C = P r iv a te consum ption
G = Government spending
I Y = G N P
Yp = Permanent income
r = Rate o f in t e r e s t
I
55
Table 13
G RO U P B— FR A N C E
Thousand M illio n Francs
Year
At i C u rre n t P ric e s
At C o n stan t
P r ic e s of
1 Q5Q
Yp
(1)
Y
(2)
C G
(3) (4)
“ 17v7
Y ( r e a l)
(5)
1953 151.9
1954 160.8
1955 164.2 172.2 115.3 21.4 227.9
1956 178.9 191.3 128.0 26.6 241.2
1957 197.3 213.0 141.7 29.9 250.3
1958 223.4 244.7 161.0 32.6 260.3
1959 248.1 267.4 173.6 37.3 267.4
1960 276.1 296.2 189.4 39.4 287.6
1961 300.7 319.7 206.4 4 2 .8 300.7
1962 332.1 356.3 229.7 4 7 .9 320.5
1963 366.8 395.6 256.8 5 3 .7 336.8
1964 403.9 431.9 277.0 57.6 355.0
Yp A C/Y ( 3/Y C/Yp r
(6) (7) (8) (9) (10)
Government C e n tr a l Bank
Year
% % % %
Bond Y ie ld s D isco u n t Rate
1950 68 12
1951
1952
1953 67 15
1954
1955 95 67 12 70 5.21 3.00
1956 94 67 14 72 5 .3 8 3.00
1957 93 67 14 72 5 .9 2 5 .0 0
1958 91 66 13 72 5 .6 8 4 .5 0
1959 93 65 14 70 5.27 4 .0 0
1960 93 64 13 68 5 .15 4 .0 0
1961 94 65 13 68 5 .0 7 3.00
1962 93 64 13 69 5 .0 2 3.00
1963 93 65 14 70 4 .9 7 3.00
1964 94 64 13 69 5 .08 3.00
C = P r iv a te consum ption
G = Government spending
Y = G N P
Yp = Permanent income
r = Rate o f in t e r e s t
Table 14
G R O U P B— ITALY
56
Thousand M illio n L ire
Year
At C u rre n t P ric e s
At C o n stan t
P ric e s of
1958
Y ( r e a l)
(5)
YP
(1)
Y
(2)
C G
(3) (4)
1953 11 ,831
1954 12 ,616
1955 13,015 13 ,807 9,213 1,887 14,915
1956 14,048 14 ,885 9,885 2,099 15,405
1957 15,169 15 ,992 10,428 2,233 16,375
1958 16,276 17 ,114 10,908 2,501 17,114
1959 17,421 18 ,290 11,356 2,695 18,367
1960 18,819 19 ,937 12,235 2,950 19,607
1961 20,567 22 ,022 13,305 3,212 21,243
1962 22,884 24 ,789 15,006 3,688 22,586
1963 25,867 28 ,329 17,543 4,568 23,774
1964 28,754 30 ,950 18,918 5 ,1 5 2 24,476
YD /Y C/Y G/Y < 3/Yp r
?6) (7) (8)
(9)
(10)
Government C e n tra l Bank
Year
% % % %
Bond Y ie ld s D iscount Rate
1950 71 11
1951
1952
1953 71 13
1954
1955 94 67 14 71
1956 94 66 14 70 6.74 4 .0 0
1957 95 65 14 69 6.81 4 .0 0
1958 95 64 15 67 6 .1 6 4 .0 0
1959 95 62 15 65 5 .4 3 3.50
1960 94 61 15 65 5.24 3.50
1961 93 60 15 65 5 .1 8 3.50
1962 92 61 15 66 5.26 3.50
1963 91 62 16 68 5 .4 3 3.50
1964 93 61 17 66 6.26 3.50
C = P r iv a te consum ption Yp = Perm anent income
G = Government spending r = Rate o f in t e r e s t
Y = G NP
Table 15
G R O U P B--JAPAN
57
Thousand M illio n Yen
At C o n sta n t
At C u rre n t P ric e s
P r ic e s o f
1960
Yp Y C G Y ( r e a l)
Year (1) (2) (3) (4)
(5)
1953 6,854
1954 7,379
1955 7,643 8,171 5,011 892 9,057
1956 8,386 8,997 5,427 874 9,845
1957 9,353 10,123 5 ,887 987 10,536
1958 9,766 9,973 6,196 1,107 10,890
1959 11,045 12,042 6,708 1,134 12,794
1960 12,533 14,060 7,510 1,348 14,592
1961 15,093 17,135 8,517 1,482 16,126
1962 17,329 19,062 10,022 1,752 17,668
1963 19,759 21,420 11,454 2,088 19,779
1964 22,604 24,968 13,040 2,421 21,984
Yp/Y C/Y G/Y C/Yp r
(6) (7) (8) (9) (10)
Government C e n tra l Bank
Year %
J L % %
Bond Y ie ld s D iscount Rate
1950 61 11
1951
1952
1953 61 10
1954
1955 94 61 11 66 8.54 7.30
1956 93 60 10 65 8 .16 7.30
1957 92 58 10 63 8.16 8 .4 0
1958 98 62 11 63 8.40 7.30
1959 92 56 9 61 7.97 7 .30
1960 89 53 10 60 8.24 6.94
1961 88 50 9 56 No d ata 7 .3 0
1962 91 53 9 58 6 .5 7
1963 92 53 10 58 5.84
1964 91 52 10 58 6 .5 7
C = P r iv a te consum ption Yp = Perm anent income
G = Government spending x = Rate o f i n t e r e s t
Y = G N P
I
Table 16
G R O U P B~SWEDEN
58
M illio n K roner
Year
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
At C u rre n t P ric e s
A il
43,095
46,444
50,071
53,119
56,412
60,398
65,427
71,044
77,175
84,514
Y
i l l
39,580
42,153
45,025
49,150
52,905
55,211
58,766
63,808
69,568
75,401
81,867
90,395
C
M .
G
i l l
At C o n stan t
P ric e s of
1959
Y ( r e a l)
(5)
28, 139 7, 555 51, 718
30, 445
8,
301 53, 368
31, 994 9, 196 55, 018
34, 204
9,
794 55, 681
35, 712 10, 481 58, 766
37, 554 11, 122 60, 902
40, 603 12, 015 64, 308
44, 050 13, 795 66, 678
47, 730 15, 330 70, 047
51, 604 16, 698 75, 085
Y pA
C/Y G/Y C/Yp
r
(6) (7) (8) (9)
(10)
Government C e n tra l 2
Year
% %
J L
%
Bond Y ie ld s D iscount
1950 67 14
1951
1952
1953 63 17
1954
1955 95 62 17 65 3.70 3.75
1956 94 62 17 66 3.75 4 .0 0
1957 95 60 17 64 4 .3 3 5.00
1958 96 62 18 64 4 .3 3 4 .5 0
1959 96 61 18 63 4 .2 8 4 .5 0
1960 95 59 17 62 4 .5 6 5.00
1961 94 58 17 62 4 .5 5 5.00
1962 94 58 18 62 4 .4 0 4 .0 0
1963 94 58 19 62 4 .4 5 5.00
1964 93 57 18 61 4 .8 0 5.00
C s P r iv a te consum ption
G = Government spending
Y = G N P
Yp = Permanent income
r = Rate o f in t e r e s t
59
Table 17
G R O U P B—SW ITZERLAND
M illio n Francs
Year
At C u rre n t P ric e s
At C o n stan t
P ric e s of
1958
Y ( r e a l)
(5)
YP
(1)
Y
(2)
C O O
G
(4)
1953 24 ,090
1954 25 ,555
1955 26,043 27 ,265 17,720 2,915 29,445
1956 27,847 29 ,285 18,935 3,100 31,215
1957 29,572 30 ,870 19,850 3,525 32,105
1958 30,798 31 ,520 20,635 3,835 31,520
1959 32,517 33 ,840 21,550 3,820 33,795
1960 34,867 37 ,055 22,830 3,870 35,760
1961 38,469 41 ,490 24,950 4,600 33,380
1962 42,661 46 ,050 27,710 5,325 40,320
1963 47,070 50 ,370 29,900 5,995 42,125
1964 51,887 55 ,565 32,500 6,715 44,290
Yp/Y C/Y G/Y C/Yn
r
(6) (7) (8) (9) (10)
Government C e n tra l Bank
Year
% % % %
Bond Y ie ld s D iscount Rate
1950 71 12
1951
1952
1953 66 12
1954
1955 96 65 11 68 2.97 1.50
1956 95 65 11 68 3.11 1.50
1957 96 64 11 67 3.64 2.50
1958 98 66 12 67 3.19 2.00
1959 96 64 11 66 3.08 2.00
1960 94 62 10 65 3.09 2.00
1961 93 60 11 65 2.96 2.00
1962 93 60 12 65 3.15 2.00
1963 93 60 12 64 3.25 2.00
1964 93 58 12 63 3.97 2.50
C = P r iv a te consum ption Yp = Perm anent income
G = Government spending r = Rate o f in t e r e s t
Y = G N P
BIBLIOGRAPHY
BIBLIOGRAPHY
Books
A ckley, G ardner. Macroeconomic T heory. New York: The
M acm illan Company, 1965.
D uesenberry, James S. Income Saving and th e Theory of
Consumer B e h a v io r. New York: Oxford U n iv e rs ity
P re s s , 1967.
Friedm an, M ilto n . A Theory of th e Consumption F u n c tio n .
P rin c e to n : P rin c e to n U n iv e rs ity P r e s s , 1967.
Keynes, John Maynard. The G eneral Theory o f Employment,
I n t e r e s t , and Money"! C h icaq o : H arbinger E d itio n ,
w ; — -----------------------
N urske, R agnar. Problem s o f C a p ita l Form ation in Under-
developed C o u n tr ie s , IJew York: Oxford U n iv e rs ity
p r e s s , i < m m :-----------------
A r t i c l e s
B odkin, R onald. “W in d fa ll Income and C onsum ption,” The
American Economic Review, XLIX (Septem ber, 1959).
F rie n d , Irw in , and Irv in g B. K ra v is . "Consumption P a t-
1 te r n s and Perm anent Incom e," The American Economic
Review, XLVII (May, 1957).
H outhakker, H. S. "The Perm anent Income H y p o th e sis,"
The American Economic Review, XLVIII (Ju n e, 1958).
K re in in , M. E. "W indfall Income and C onsum ption," The
American Economic Review, LI (Ju n e, 1961).
I
Mayer, Thomas. "The P ro p e n sity to Consume Perm anent I n ­
come," The American Economic Review, LVI (December,
1966) -------------------------------------------------- 
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University of Southern California Dissertations and Theses
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University of Southern California Dissertations and Theses 
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Creator Oner, Ayhan (author) 
Core Title The test of the permanent income hypothesis 
Contributor Digitized by ProQuest (provenance) 
Degree Master of Arts 
Degree Program Economics 
Publisher University of Southern California (original), University of Southern California. Libraries (digital) 
Tag Economics, Theory,OAI-PMH Harvest 
Language English
Advisor Nugent, Jeffrey B. (committee chair), Brown, Alan A. (committee member), Morgner, Aurelius (committee member) 
Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-459195 
Unique identifier UC11265367 
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Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection) 
Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au... 
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Tags
Economics, Theory