Stochastic Implications of the Life Cycle-Permanent Income Hypothesis in Spain: Theory Vs. Evidence

Abstract

In 1978 Robert E. Hall published his work on the stochastic implications of the hypothesis of life-cycle and permanent income. The marginal utility of consumption evolves with a tendency to a random walk, this means ultimately that no variable apart from current consumption can predict future consumption. These implications are explained by the author theoretically and empirically. He analysed data on the consumption of non-durables and disposable income in the US from 1944 to 1971. As a result of his findings, he was able to reject the above cited implication, as some past values of the income appeared to have, even though very slight, a somewhat predictive power for future consumption. In the same way in this present work an empirical analysis of both theories has been carried out, but using Spanish data on final consumption of households and remuneration of salaried workers during the second half of the 90s and the first decade of the XXI century, which also includes, the great global recession of 2007. The two works have reached very similar conclusions since in both countries, as in the two time periods, the results seem to point to very similar answers. It can be concluded that the evidence supports a somewhat modified version of the life-cycle permanent income hypothesis.