Econometrica: Jan, 1971, Volume 39, Issue 1
The Propensity to Consume Separate Types of Income: A Generalized Permanent Income Hypothesis
Frank Stafford, Robert Holbrook
A multivariate errors-in-variables model is used to analyze the propensity to consume from each of several sources of income for a sample of 621 families in a three year (1960-1962) panel study. The analysis provides estimates of the relationships among the transitory components of the various types of income (contemporary and intertemporal) as well as the marginal propensities to consume out of the permanent component of income from each source. Total family income is much more stable than its components, as there is a tendency for changes in head's income to be offset by opposite changes in wife's and transfer income. The marginal propensity to consume out of the permanent component of both the head's and wife's labor income is .9, a result consistent with Friedman's for aggregate income, and implying that growing labor force participation of wives should have no effect on the long run savings rate.