What Is the Permanent Income Hypothesis?

Proposed by the leader of monetarism Milton Friedman (1912-2006).

Permanent income hypothesis

It allows a large amount of data on consumer budget income to be used to interpret income distribution data and to translate income distribution data into estimates of the distribution of permanent income status. Third, Friedman believes that the permanent income hypothesis breaks down both the direct link between real national income and the savings rate, and also the indirect link between the two. The savings rate is independent of the level of national income. Therefore, the important role of economic development must be attributed to investment, not to the saving process. In terms of economic fluctuations, Friedman disagrees that it blame the interplay between unstable investment and the relatively stable relationship between consumption and current income. The internal circulation system between them is considered stable.