The Effect of the Temporary and Permanent Income Shock to Household’s Consumption in Iran Using Blanchard-Quah Method

Document Type : Research Paper

Authors

1 Assistant Professor of Economics, Bu-Ali Sina University

2 PhD Candidate in Economics, Bu-Ali Sina University

Abstract

Temporary and permanent income shocks are the most important determinants of household’s consumption. According to Friedman's permanent income hypothesis, household consumption always responds to permanent income shock more than temporary shocks. Given that these two components shock separately are unobservable, in this paper we use Blanchard-Quah method to decompose the income shocks into temporary and permanent and then by applying Structural Vector Auto-regression model to identify the effect of that two shock components on household’s consumption in Iran during the 1974-2014 years. The results from the estimated model confirm the validity of the PIH in Iran. So that household consumption almost entirely explained by permanent shocks income. But it does not show sensitivity to temporary shocks.

Keywords

References

  1. اکبری فرد، محسنی، و کوشش، محمد سجاد (1388). اثر تکانه‌های درآمدی بر تراز تجاری در اقتصاد ایران. فصلنامه اقتصاد مقداری (بررسی‌های اقتصادی سابق)، 6(3)، 129-146.
  2. اندرس، والتر (1391). اقتصادسنجی سری‌های زمانی با رویکرد کاربردی. ترجمه مهدی صادقی و سعید شوال‌پور، تهران، انتشارات دانشگاه امام صادق، جلد دوم، چاپ سوم.
  3. بنی اسدی، مصطفی، و محسنی، رضا (1393). اثرشوک‌های دائمی و موقت بهره‌وری بر مصرف انرژی در ایران (کاربرد بلانچارد- کوا). فصلنامه اقتصاد انرژی ایران، 3(10)، 41-65.
  4. روشن، رضا، پهلوانی، مصیب، و شهیکی تاش، محمد نبی (1392). بررسی قاعده‌ سرانگشتی مصرف با روش گشتاورهای تعمیم‌یافته در ایران. فصلنامه علمی-پژوهشی مدلسازی اقتصادی، 8(25)، 53-65.
  5. زراء نژارد، منصور (1382). تخمین تابع مصرف کالاهای مصرفی برای دو گروه خانوارهای شهری و روستایی ایران در دوره (1353-1377). پژوهش‌های اقتصادی ایران، 3(5)، 23-46.
  6. عاقلی، لطفعلی، و امامقلی، سارا (1391). اهمیت ثروت‌های مالی در مصرف بخش خصوصی کشور: نگاهی استراتژیک در راستای اصلاح الگوی مصرف. فصلنامه راهبرد اقتصادی، 1(1)، 125-144.
  7. فخرایی، عنایت الله، و منصوری، سید امین (1388). برآورد میل نهایی به مصرف در گروه‌های درآمدی بر اساس فرضیه درآمد دائمی نسبی در ایران. دانش و توسعه، 17(29)،21-38.
  8. مرکز آمار ایران (1393). نتایج آمارگیری از هزینه و درآمد خانوارهای روستایی و شهری در سال‌های 1393-1353. تهران، مرکز آمار ایران.
  1. Ahmad, A. H., & Pentecost, E. J. (2012). Identifying aggregate supply and demand shocks in small open economies: empirical evidence from African countries. International Review of Economics & Finance, 21(1), 272-291.
  2. Alimi, R. S. (2015). Estimating consumption function under permanent income hypothesis: a comparison between Nigeria and South Africa.‏ International Journal of Academic Research in Business and Social Sciences, 11, 285-298.
  3. Altunc, O. F., & Aydin, C. (2014). An estimation of the consumption function under the permanent income hypothesis: the case of D-8 countries. Journal of Economic Cooperation and Development, 35(3), 29-42.
  4. Ando, A., & Modigliani, F. (1963). The life-cycle hypothesis of saving: aggregate implications and tests. American Economic Review, 53, 55-84.
  5. Bashar, O. H. (2012). The dynamics of aggregate demand and supply shocks in ASEAN countries. Journal of Asian economics, 23(5), 507-518.
  6. Bilgili, F. (2007). The permanent and transitory effects on consumption and income: Evidence from the Turkish economy. MPRA, 24090, 1-15.
  7. Blanchard, O., & Quah, D. (1989). The dynamic effects of aggregate demand and supply disturbances. American Economic Review, 79, 655-673.
  8. Blundell, R., Pistaferri, L., & Preston, I. (2008). Consumption inequality and partial insurance. The American Economic Review, 98(5), 1887-1921.
  9. Campbell, J. Y., & Mankiw, G. N. (1989). Consumption income and interest rates: Reinterpreting the time series evidence. NBER Macroeconomics Annual, 4, 185–216.
  10. Carroll, C. (1994). How does future income affect current consumption?. Quarterly Journal of Economics, 109, 111–148.
  11. Casado, J. M. (2011). From income to consumption: measuring household’s partial insurance. Empirical Economics, 40(2), 471-495.
  12. Cochrane, J. (1991). A simple test of consumption insurance. Journal of Political Economy, 99 (5), 957-976.
  13. Cuong, N. V. (2013). The impact of social security on household welfare: Evidence from a transition country. European Journal of Development Research, 25(5), 737-757.
  14. Deaton, A. (1992). Understanding consumption. Clarendon lectures in economics, Oxford university press and Clarendon press.
  15. DeJuan, J. P., & Seater, J. J. (2006). A simple test of Friedman's permanent income hypothesis. Economica, 73(289), 27-46.‏
  16. Duesenberry, J. S. (1949). Income, saving and the theory of consumer behavior, Harvard University press.
  17. Falk, B., & Lee, B. S. (1998). The dynamic effects of permanent and transitory labor income on consumption. Journal of Monetary Economics, 41(2), 371-387.
  18. Flavin, M. (1981). The adjustment of consumption to changing expectations about future income. Journal of Political Economy, 89, 974–1009.
  19. Friedman, M. (1957). A theory of the consumption function. Bureau of Economic Research, Princeton university press, 63, 157-182.
  20. Hall, R.E. (1978). Stochastic implications of the life-cycle-permanent
    income hypothesis: Theory and evidence. Journal of Political Economy, 86 (6), 971-987.
  21. Hall, R. E., & Mishkin, F. S. (1982). The sensitivity of consumption to transitory income: evidence from PSID households. Econometrica, 50(2), 461–481.
  22. Hamaaki, J. (2013). The pension system and household consumption and saving behavior. Public Policy Review, 9(4), 687-716.
  23. Huang, Y. L., Huang, C. H., & Kuan, C. M. (2008). Reexamining the permanent income hypothesis with uncertainty in permanent and transitory innovation states.  Journal of Macroeconomics, 30(4), 1816-1836.
  24. Hori, M., & Shimizutani, S. (2012). Do households smooth expenditure over anticipated income changes? Evidence from bonus payments to public employees in Japan. Journal of the Japanese and International Economies, 26(3), 405-433.
  25. Jappelli, T., & Pistaferri, L. (2010). The consumption response to income changes, National Bureau of Economic Research, 2:479–506.
  26. Jappelli, T., & Pistaferri, L. (2010). Financial integration and consumption smoothing, Economic Journal, 121(553), 678–706.
  27. Johnson, D. S., Parker, J. A., & Souleles, N. S. (2006). Household expenditure and the income tax rebates of 2001, American Economic Review, 96(5), 1589–1610.
  28. Khan, K., Anwar, S., Ahmed, M., & Kamal, M. A. (2015). Estimation of Consumption Functions: The Case of Bangladesh, India, Nepal, Pakistan and Sri Lanka. Pakistan Business Review, 17(1), 113-124.‏
  29. Keating, J. W. (2013). What do we learn from Blanchard and Quah decompositions of output if aggregate demand may not be long-run neutral?. Journal of Macroeconomics, 38, 203-217.
  30. Keynes, J. M. (1936). The general theory of employment, interest, and money. Macmillan University, London, 96.
  31. Kukk, M., Kulikov, D., & Staehr, K. (2016). Estimating consumption responses to income shocks of different persistence using self-reported income measures. Review of Income and Wealth, 62(2), 311-333.
  32. Luengo-Prado, M. J., & Sørensen, B. E. (2008). What can explain excess smoothness and sensitivity of state-level consumption?. The Review of Economics and Statistics, 90(1), 65-80.‏
  33. Manitsaris, A. (2006). Estimating the European Union consumption function under the permanent income hypothesis. International Research Journal of Finance and Economics, 2, 131-135.‏
  34. Meghir, C. (2004). A retrospective on Friedman's theory of permanent income. The Economic Journal, 114(496), 293-306.‏
  35. Mu, R. (2006). Income shocks, consumption, wealth, and human capital: evidence from Russia. Economic Development and Cultural Change, 55, 857–892.
  36. Ni, S., & Seol, Y. (2014). New evidence on excess sensitivity of household consumption. Journal of Monetary Economics, 63, 80-94.
  37. Notten, G., & Crombrugghe, D. D. (2012). Consumption smoothing in Russia. Economics of Transition, 20(3), 481-519.
  38. Parker, J. A. (1999). The reaction of household consumption to predictable changes in social security taxes. American Economic Review, 89(4), 959-973.
  39. Paxson, C. (1993). Consumption and income seasonality in Thailand. Journal of Political Economy, 101 (1), 39-72.
  40. Perri, F., & Krueger, D. (2008). How does household consumption respond to income shocks?.Journal of Economic Theory, 146, 920-956.
  41. Pistaferri, L. (2001). Superior information, income shocks, and the permanent income hypothesis. Review of Economics and Statistics,83(3), 465-476.
  42. Shirvani, H., & Wilbratte, B. (2009). The permanent income hypothesis in five major industrial countries: a multivariate trend-cycle decomposition test. Journal of Economics and Finance, 33(1), 43-59.‏
  43. Sims, C. (1980). Macroeconomic and Reality. Econometrica, 48, 1-49.
  44. Souleles, N. S. (1999). The response of household consumption to income tax refunds. American Economic Review, 89(4), 947-958.
  45. Souleles, N. S. (2002). Consumer response to the Reagan tax cuts. Journal of Public Economics, 85, 99-120.
  46. Stephens Jr, M. (2001). The long-run consumption effects of earnings shocks. Review of Economics and Statistics, 83(1), 28-36.
  47. Stephens Jr, M. & Unayama, T. (2011). The consumption response to seasonal income: evidence from Japanese public pension benefits. American Economic Journal: Applied Economics, 3(4), 86-118.‏
  48. Stillman, S. (2001).The response of consumption in Russian households to economic shocks, IZA Discussion Paper, 411, 1-66
  49. Yazdan, F. G., & Sina, M. (2013). The testing of Hall's permanent income hypothesis: a case study of Iran. Asian Economic and Financial Review, 3(3), 311-318.
  50. Zarra-Nezhad, M., Saeidi, S. N., & Mansoury, S. A. (2011). Estimation of nonlinear marginal propensity to consume in Iran. European Journal of Economics, Finance and Administrative Sciences, (41), 65-72.
Quarterly Journal of Applied Theories of Economics
Volume 3, Issue 3 - Serial Number 10
November 2016
Pages 93-114

Files

Share

How to cite

Statistics