The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data

Abstract

The permanent income hypothesis with durability of commodities is tested on a panel of about 2,000 Japanese households for several commodity groups. Under static expectations about real interest rates and for some class of utility functions, consumption, which is a distributed lag function of current and past expenditure, follows a martingale. Main empirical results are (i) the durability of commodities usually classified as services is substantial, (ii) the hypothesis applies to about 85 percent of the population consisting of wage earners, and (iii) income changes explain only a small fraction of the movements in expenditure.