Household Production and the Excess Sensitivity of Consumption to Current Income / Marianne Baxter, Urban J. Jermann.

Format:

Book

Author/Creator:

Baxter, Marianne.

Contributor:

National Bureau of Economic Research.

Jermann, Urban J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7046.

NBER working paper series no. w7046

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

Empirical research on the permanent income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium version of Becker's (1965) model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth.

Notes:

Print version record

March 1999.