Transcription of The Permanent Income Hypothesis
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The Permanent Income Hypothesis
This PDF is a selection from an out-of-print volume from the NationalBureau of Economic ResearchVolume Title: A Theory of the Consumption FunctionVolume Author/Editor: Milton FriedmanVolume Publisher: Princeton University PressVolume ISBN: 0-691-04182-2 Volume URL: Date: 1957 Chapter Title: The Permanent Income HypothesisChapter Author: Milton FriedmanChapter URL: pages in book: (p. 20 - 37)CHAPTER IIITheIncome HypothesisTHE magnitudes termed " Permanent Income " and " Permanent con-sumption" that play such a critical role in the theoretical analysiscannot be observed directly for any individual consumer unit. Themost that can be observed are actual receipts and expenditures duringsome finite period, supplemented, perhaps, by some verbal statementsabout expectations for the future. The theoretical constructs are exantemagnitudes;the empirical data are ex post. Yet in order to usethe theoretical analysis to interpret empirical data, a correspondencemust be established between the theoretical constructs and theobserved most direct way to doio, and the one that has generally beenfollowed in similar contexts, is to construct estimates of permanentincome and Permanent consumption for each consumer unit separatelyby adjusting the cruder receipts and expenditure data for some oftheir more obvious defects, and then to treat the adjusted ex postmagnitudes as if they were also the desir
PERMANENT INCOME HYPOTHESIS earlier workers have done, or to resort to more indirect means of establishing a correspondence between .the theoretical constructs and
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