Is Aggregate Consumer Borrowing Consistent with the Permanent Income Hypothesis?

Posted: 22 Sep 2001 Last revised: 17 May 2021

See all articles by Sangkyun Park

Sangkyun Park

Independent

Anthony P. Rodrigues

Federal Reserve Bank of New York

Date Written: June 01, 2000

Abstract

Using US data covering from 1959 to 1994, we examine the consistency of aggregate consumer borrowing with the permanent income life-cycle hypothesis (PI LCH) and the predictive power of consumer borrowing. The PI LCH implies that consumer borrowing should be an increasing function of the gap between permanent and current income. In addition, if consumers accurately estimate permanent income, large borrowing should be associated with rapid income growth in the future. Our empirical results support the PI LCH; consumer borrowing increases with the estimate of permanent income and decreases with current income. The predictive power of consumer borrowing, however, is marginal; lagged consumer borrowing explains only a small portion of income growth and does not Granger-cause income growth.

Suggested Citation

Park, Sangkyun and Rodrigues, Anthony P., Is Aggregate Consumer Borrowing Consistent with the Permanent Income Hypothesis? (June 01, 2000). Manchester School, Vol. 68, No. 3, June 2000, Available at SSRN: https://ssrn.com/abstract=242845

Anthony P. Rodrigues

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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