Permanent income hypothesis: a theoretical formulation

Front Cover
Natl. Tech. Inform. Service, 1976 - 67 pages
This paper defends the view that in dealing with a consumer's 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 consumer's intertemporal maximization problem. It is assumed that the consumer may hold money, but may not borrow. The consumer's utility function is assumed to be additively separable with respect to time. Prices, the consumer's 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 consumer's 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).

From inside the book

What people are saying - Write a review

We haven't found any reviews in the usual places.

Contents

Section 1
8
Section 2
11
Section 3
14

1 other sections not shown

Common terms and phrases

Bibliographic information