Permanent IncomeModels
Permanent IncomeModels
This chapter uses the model of preferences to represent multiple goods versions of permanent income models. It retains Robert Hall's (1978) specification of a “storage” technology for accumulating physical capital and also a restriction on the discount factor, depreciation rate, and gross return on capital that in Hall's simple setting made the marginal utility of consumption a martingale. In more general settings, adopting Hall's specification of the storage technology imparts a martingale to outcomes, but it is concealed in an “index” whose increments drive demands for multiple consumption goods that themselves are not martingales. This permanent income model forms a convenient laboratory for thinking about sources in economic theory of “unit roots” and “co-integrating vectors”.
Keywords: preferences model, multiple goods, permanent income model, storage technology, consumption
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