The random walk model of consumption was introduced by economist Robert Hall.
[1] His approach is differentiated from earlier theories by the introduction of the Lucas critique to modeling consumption.
Hall’s thoughts were: According to the permanent-income hypothesis, consumers deal with shifting income and try to smooth their consumption over time.
At any given moment, a consumer selects their consumption based on their current expectations of their lifetime income.
Throughout their life, consumers modify their consumption because they receive new information that makes them adjust their expectations.
Robert Hall’s rational expectation approach to consumption creates implications for forecasting and analyzing economic policies.
“If consumers obey the permanent-income hypothesis and have rational expectations, then only unexpected policy changes influence consumption.
This avoids the need to solve the consumer's optimization problem and is the most appealing element of using Euler equations to some economists.
[5][6] Attempting to use the Euler equations to model consumption in the United States has led some economists to reject the random walk hypothesis.
[7] Some argue that this is due to the model's inability to uncover consumer preference variables such as the intertemporal elasticity of substitution.