Permanent Income Hypothesis, Myopia and Liquidity Constraints: A Case Study of Pakistan

Abstract

In this paper, it is attempted to test the permanent income hypothesis
(PIH) for Pakistan. If the PIH is not valid for Pakistan the study also
attempts to find out the reasons for rejection of PIH. Hall’s random
walk model (1978) and Campbell and Mankiw model (1990) are used
to test for the validity of PIH. The results of this study indicate the
strong validity of absolute income hypothesis (AIH) rather than PIH.
Therefore, to find out the reasons for the rejection of the PIH in
Pakistan we used Shea (1995) model. The results of the Shea (1995)
model rejected the symmetric relationship between consumption and
expected income and provide a little evidence of existence of liquidity
constraints.