Accession Number:

ADA031359

Title:

The Permanent Income Hypothesis: A Theoretical Formulation.

Descriptive Note:

Technical rept.,

Corporate Author:

HARVARD UNIV CAMBRIDGE MASS

Personal Author(s):

Report Date:

1976-09-01

Pagination or Media Count:

71.0

Abstract:

This paper defends the view that in dealing with a consumers reponse to short-term changes, it is reasonable to assume that the marginal utility of money is constant. A theoretical defense of this view is made in terms of the consumers intertemporal maximization problem. It is assumed that the consumer may hold money, but may not borrow. The consumers utility function is assumed to be additively separable with respect to time. Prices, the consumers income, and his utility function for each period are assumed to fluctuate according to a stationary stochastic process. It is proved that if the time horizon of the consumers problem is sufficiently distant, if his discount rate for future utility is sufficiently small, and if he has a sufficient quantity of money, then the marginal utility of money is nearly independent of current prices and income and is nearly constant over time. The proof of these facts is based on economic common sense and the strong law of large numbers for stationary processes. Author

Subject Categories:

  • Economics and Cost Analysis

Distribution Statement:

APPROVED FOR PUBLIC RELEASE