Permanent Income Hypothesis: Case of the Czech Republic

This thesis tests the permanent income hypothesis using a generalized model. In this model, consumer units are divided into two groups. The first group is representative of consumers whose consumption expenditure is determined by their current disposable income. A fraction of this group from the entire population is designated as λ. The second group is made up of consumers who behave in accordance with the permanent income hypothesis. A fraction of the second group is represented as the remainder of population (1 – λ). Testing of the hypothesis was done by estimation of the coefficient λ and its econometric evaluation. An instrumental variable approach together with a two-stage least-squares regression analysis was used as an estimation method. The data set consists of quarterly time series from The Czech Republic covering the years 1996 – 2017. Consumption is measured as expenditures on goods for short-term consumption and GDP was used as a proxy variable of disposable income. Using the data about expenditures on goods for short-term consumption as an endogenous variable, the permanent income hypothesis was not rejected. Strict version of the hypothesis was rejected when data on expenditures on short-term consumption goods and services were used.