Consumption Flashcards
1
Q
Set up permanent income hypothesis
A
2
Q
Natural borrowing limit
A
Consumption is non-negative
3
Q
Permanent income definition
A
Constant flow of income whose present value equals the present value of all current and future income and assets
4
Q
Implications of permanent income hypothesis
A
- Current income is a function of the permanent income
- Current income only matters through its effect on permanent income
- Households want to smooth consumption over time
- Individuals decide current consumption by looking at the discounted present value of all their future income
- Changes in current income have only a minor effect in current consumption
- Changes in current income have a full impact on savings
- Profile of the income process is irrelevant to determine the consumption level but it does determine the profile fo savings
5
Q
Government’s budget constraint
A
6
Q
Equilibrium definition under ricardian equivalence
A
7
Q
Ricardian equivalence
A
8
Q
Violations of the ricardian equivalence to hold
A
- Finite lifetimes
- Capital market imperfections
- Income uncertainty
- Distortionary taxation
- Different interest rates
