The Testing of Hall‘s Permanent Income Hypothesis: A Case Study of Pakistan

The objective of this study is to test the Hall’s permanent income hypothesis for Pakistan using annual data from 1992 to 2010. The basic model of permanent income hypothesis (PIH) showed the validity of absolute income hypothesis (AIH) while the Campbell and Mankiw (1990) consumption model suggested that the proportion of forward looking consumers in total population is 32 percent and the remaining consumers are backward looking. Therefore in Pakistan, there is larger fluctuation in per capita income and small opportunity for consumption smoothing.