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Permanent Income Hypothesis Definition
This is a hypothesis stating that consumers will spend at a level relative to their expected level of long-term income. The consumer sees a certain level of income as recurring or permanent.
A Little More on the Permanent Income Hypothesis
Milton Friedman came up with the permanent income hypothesis in 1957. Consumption spending will be based on consumer expectations about their earnings over a long period. As such, spending habits will change based upon their individual expectations.
Expectations will vary based upon how they perceive factors affecting their future earnings. Therefore, policy decisions that affect a consumer’s perception of long-term earnings will result in increased spending.
Inflows of capital that are not seen as long-term may result in immediate spending, saving, or investing – depending upon the spending history and liquid assets of the recipient. Individuals will only save money when they earn at a rate above their expected, long-term rate.
References for “Permanent Income Hypothesis”