Fixed Amount Saving and the Permanent Income Hypothesis

Abstract

According to the German SAVE survey, more than 40 percent of households regularly save fixed amounts rather than flexibly adjusting savings to income variations as assumed by the Permanent Income Hypothesis (PIH). Fixed amount saving behaviour could thus imply a challenge to PIH-based standard models of consumption if it meant that a substantial share of households would consume rather than save transitory income. A deeper examination of the SAVE-data suggests that the PIH could still be compatible with fixed amount saving behaviour since (a) the transitory income component of fixed amount savers’ tends to be relatively low and (b) one-off receipts of income likely to be transitory increase the probability of fixed amount savers to alter their saving behaviour and save the residual. Analysis of aggregate data, however, indicates that fixed amount saving nevertheless leads to a rejection of the PIH, accounting for at least some of the excess sensitivity of consumption to predictable income changes observed in Germany.

Keywords: Fixed Amounts Saving, Permanent Income Hypothesis, Consumption, Excess Sensitivity

JEL Classification: D11, D12, E21