Consumption: The permanent income hypothesis and the Argentine evidence

Abstract

The theory of the consumption function has evolved as has economic theory in general. The verification process of the different proposed theories has mainly analyzed their capacity to explain the events of developed countries. In this sense, the most attractive functions to explain consumption behavior, at a theoretical level, are those based on the life cycle or the permanent income hypothesis, while, at an empirical level, the verification process has used increasingly complex econometric techniques. A good knowledge of consumption behavior is essential for the analysis of aggregate demand policies. According to the hypothesis of permanent income based on rational expectations, individuals observe their future flow of income to determine the current value of their wealth and from this they decide their present and future consumption. The objective of this article is to analyze, taking into account the aggregate information available, whether or not the Argentine empirical evidence supports the consumption theory that is deduced from the hypothesis of permanent income based on rational expectations.

JEL classification: C20 ; E21