Testing the Permanent Income Hypothesis for Irish Households, 1994 to 2005

Abstract

The Permanent Income Hypothesis (PIH) states that consumption should depend on long-term income expectations and not on temporary swings in income. This paper uses Irish household data from three Household Budget Surveys between 1994 and 2005 to test the PIH. Households that fail to consume their permanent income may do so because they have no access to credit or because they save, be it for a rainy day, a purchase, bequests, or simply because saving conditions are attractive. We find some evidence for credit constraints, for instance for mortgage households in arrears in the mid-1990s. Furthermore, mortgage households during the housing boom consistently consumed less than predicted by their permanent income, which may be related to planned house purchases or the Special Savings Incentive Account scheme.