LCPIHLife Cycle / Permanent Income Hypothesis (economics)
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Most quantitative tests of the LCPIH have concluded that consumption is sensitive to transitory shocks and have rejected the hypothesis.
In addition to ignoring the problem of credit repayments and assuming that expenditure data exist, the LCPIH also assumes that capital markets are perfect in the sense that all borrowing and lending occurs at the same riskless rate (Hall 1978), that the rate of return on assets is constant and expected to remain so (Ando and Modigliani 1983), that the assumption of a utility function separable in the major categories of consumption--durables, nondurables, and services--allows the estimation of one of these groups alone as the consumption concept (Flavin 1981), and that a liquidity constraint exists that is an upper bound beyond which consumption cannot occur (Flavin 1981; Hayashi 1985).