TY  - JOUR
AU  - Baxter,Marianne
AU  - Jermann,Urban J.
TI  - Household Production and the Excess Sensitivity of Consumption to Current Income
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7046
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7046
L1  - http://www.nber.org/papers/w7046.pdf
N1  - Author contact info:
Marianne Baxter
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-2417
Fax: 617/353-4449
E-Mail: mbaxter@bu.edu

Urban Jermann
Finance Department
Wharton School of the University of Pennsylvania
3620 Locust Walk
Philadelphia, PA  19104
Tel: 215/898-4184
Fax: 215/898-6200
E-Mail: jermann@wharton.upenn.edu
AB  - Empirical research on the permanent income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income.  This finding is interpreted as strong evidence against the PIH.  We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium version of Becker's (1965) model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors.  Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth.
ER  -