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The permanent income hypothesis (PIH) ... In A Theory of Consumption Function, Friedman develops: = + as a formula. In an earlier study, Friedman, Kuznets (1945), he ...
Robert Hall was the first to derive the effects of rational expectations for consumption. His theory states that if Milton Friedman’s permanent income hypothesis is correct, which in short says current income should be viewed as the sum of permanent income and transitory income and that consumption depends primarily on permanent income, and if consumers have rational expectations, then any ...
Average propensity to consume (APC) (as well as the marginal propensity to consume) is a concept developed by John Maynard Keynes to analyze the consumption function, which is a formula where total consumption expenditures (C) of a household consist of autonomous consumption (C a) and income (Y) (or disposable income (Y d)) multiplied by marginal propensity to consume (c 1 or MPC).
Further theories on the shape of the consumption function include James Duesenberry's (1949) relative consumption expenditure, [9] Franco Modigliani and Richard Brumberg's (1954) life-cycle hypothesis, and Milton Friedman's (1957) permanent income hypothesis. [10]
The permanent income hypothesis was developed by Milton Friedman in the 1950s in his book A theory of the Consumption Function. This theory divides income into two components: Y t {\displaystyle Y_{t}} is transitory income and Y p {\displaystyle Y_{p}} is permanent income, such that Y = Y t + Y p {\displaystyle Y=Y_{t}+Y_{p}} .
Friedman's research introduced the term "permanent income" to the world, which was the average of a household's expected income over several years, and he also developed the permanent income hypothesis. Friedman thought income consisted of several components, namely transitory and permanent. He established the formula = + to calculate income ...
Since Friedman's 1956 permanent income theory and Modigliani and Brumberg's 1954 life-cycle model, the idea that agents prefer a stable path of consumption has been widely accepted. [9] [10] This idea came to replace the perception that people had a marginal propensity to consume and therefore current consumption was tied to current income.
This was realized by Friedman (1957), [5] and later by Ando and Modigliani (1963) [6] and Bewley (1977) [7] in their seminal work on the permanent income hypothesis (PIH). The relevance of the life-cycle framework, therefore, builds on intertemporal allocation of resources between the present and an uncertain future with the goal of maximizing ...