Do Changes in Current Income Help to Explain Changes in Consumption in Israel?
This paper examines the extent to which the rate of change of private consumption (per capita) can be forecast on the basis of the rates of change of predictable income and the rate of return on assets-share yields and short-term interest. As is well known, a strong link between a change in private consumption and in predictable income contradicts the permanent income hypothesis with rational expectations. The empirical test focuses on the period between 1963 and 2000, by enlarging our previous sample which lasted in 1993. The main empirical result of this study shows the considerable effect of the rate of change of predictable wage income on consumption-around 0.5. In other words, half the population seems to set its consumption on the basis of changes in current income. Another finding is the significant effect of the rate of return on shares on consumption, although its elasticity is relatively small. Including in the sample the large-scale immigration wave from former USSR mildly increased, as expected, the income elasticity, and it slowed the speed of adjustment of consumption to permanent income.