Permanent-income hypothesis

Permanent-income hypothesis is the theory of consumption according to which people choose consumption based on their permanent income, and use saving and borrowing to smooth consumption in response to transitory variations in income.

Definition

According to Macroeconomics by Mankiw (7th edition),

Permanent-income hypothesis. The theory of consumption according to which people choose consumption based on their permanent income, and use saving and borrowing to smooth consumption in response to transitory variations in income.