Poverty, excess sensitivity and the permanent income hypothesis: evidence from a developing country

Abstract

In this paper we develop a very simple test to measure ‘poverty’ in a developing country. From evidence on aggregate consumption we obtain an estimate of the proportion of labour income received by consumers who own no physical or financial assets or have access to credit. Evidence from a developing country – India – indicates a role for current income in explaining consumption over and above that predicted by the permanent income hypothesis. This may be attributed to ‘poverty’, the inability to save or borrow.