The permanent income hypothesis is an economic theory that suggests that individuals adjust their spending habits based on their long-term or permanent income rather than their current income. The theory was developed by economist Milton Friedman in 1957 and suggests that individuals save or borrow money in order to maintain a stable level of consumption over time, regardless of short-term fluctuations in income. In essence, individuals try to smooth out their consumption patterns over time to reflect their long-term income expectations.
