EMPIRICAL TESTING OF PERMANENT INCOME HYPOTHESIS FOR PAKISTAN AND U.S ECONOMIES

M. Fahad MALIK* and Muhammad Mazhar IQBAL**

The permanent income hypothesis (PIH) has been empirically tested widely, but, the results
are mixed. The probable reason for mixed results is different methodologies that make different
underlying assumptions. The underlying assumptions are often contrary to the spirit of PIH.
Moreover, some studies have tested it for a developed country or a set of developed countries,
while others have tested it for a developing country or a set of developing countries. Therefore,
this study applies both methods and uses the data of a developed country, such as the USA
and of a developing country, such as Pakistan. The results show that PIH provides a good approximation
of consumption decisions in both economies.