Key Equations:
Modigliani's finding:
\(\frac{c_t}{y_t} = \alpha \frac{A_{t - 1}}{y_t} + \beta\)
This explains the empirical finding that consumption over income is constant in time series but declining in cross-sectional data. It turns out, with cross-sectional data, you are including people in different "cohorts" or stages in their life. Hence, you would not expect assets and income to move together necessarily.
Friedman's permanent income equations:
\(c = c^P + c^T \) and \(y = y^P + y^T\)
The econometric problem is that they will vary together and the coefficients will be downward-biased.