LCPIHLife Cycle / Permanent Income Hypothesis (economics)
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The Life-Cycle Permanent Income Hypothesis (LCPIH), which is now generally accepted as the correct application of theory to explain the allocation of consumer spending through time, predicts that transitory shocks have a minimal impact on consumption patterns.
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).