Is Household Consumption in the Permanent Income Hypothesis (PIH) Valid in Crisis Period?: A Systematic Literature Review
Nimatush Sholikhah, Dyah Wulan Sari, Lilik Sugiharti

Airlangga University

Abstract

Since the early 19th century, the Permanent Income Hypothesis (PIH) declared by Friedman on 1957 has been the subject of extensive empirical research. The Permanent Income Hypothesis (PIH) states that only permanent changes in income can change a persons consumption. This study focused on testing the validity of the Permanent Income Hypothesis (PIH) in crisis period. This research is a systematic literature review using the PRISMA method. Based on a literature search of the Scopus database, only 18 articles are worthy for further review. The results showed that: (1) There is validity in favor of the permanent income hypothesis. Temporary changes in household income decline due to the business cycle have no effect on household consumption. This is due to savings factors, ease of credit, and additional work. (2) Invalidity of the permanent income hypothesis during recession. Temporary shocks during recessions cause consumer households lower their consumption levels rather than maintain permanent consumption. This is due to consumer expectations and financial institutions tend to be conservative.

Keywords: Permanent Income Hypothesis, Household Consumption, Crisis Period

Topic: Development economics (colloquium)