Title

New Tests of the Life Cycle and Tax Discounting Hypotheses

Publication Type

Journal Article

Publication Date

1985

Abstract

We first test a version of the permanent income consumption function recently suggested by Barro. The results support the theory except that consumption expenditures show sensitivity to transitory income. Next we use the consumption model to test the tax discounting hypothesis, which is strongly supported. This support for tax discounting disagrees with results from some earlier studies using more traditional specifications of the consumption function. However, we show that when certain obviously inadequate estimation procedures are corrected, the traditional models also support tax discounting. This uniform support for tax discounting suggests that the sensitivity of consumption to transitory income is not due to liquidity constraints.

Discipline

Economics

Research Areas

Econometrics

Publication

Journal of Monetary Economics

Volume

15

Issue

2

First Page

195

Last Page

215

ISSN

0304-3932

Identifier

10.1016/0304-3932(85)90064-9

Publisher

Elsevier

Additional URL

http://dx.doi.org/10.1016/0304-3932(85)90064-9

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