Empirical Testing of the Permanent Income Hypothesis Using Data on France

This article tests the permanent income hypothesis (PIH) against contemporary (2006–2019) quarterly data on household income and consumer spending in France. The methodology follows the approaches developed by J. Campbell and N. Mankiw, as well as J. Shea. Specifically, the econometric analysis employs the two-stage least squares (2SLS) method, using predicted values of income and interest rates generated by a set of instruments that include lagged values of the relevant variables. The analysis does not support the permanent income hypothesis using data on France. To explore potential explanations for this result, the article tests additional hypotheses, namely the presence of liquidity constraints and consumer myopia. However, neither of these factors appears to account for the failure of the PIH. French household consumption is more responsive to falling income than to rising income. This phenomenon, that is, consumption’s stronger reaction to income losses than to gains, is sometimes referred to as perverse asymmetry. It may reflect a precautionary saving motive: consumers prioritize maintaining a buffer of savings to guard against future financial instability, rather than maximizing consumption in the present. This behavior aligns with Christopher Carroll’s buffer-stock saving theory. These results are consistent with those from similar studies conducted on data from other countries, including the United States, Russia, and Japan.