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The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income

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Author Info
James Ramsey (New York University)
Camille Lampart (New York University)
Abstract

Economists have long known that time scale matters, in that the structure of decisions as to the relevant time horizon, degree of time aggregation, strength of relationship, and even the relevant variables differ by time scale. Unfortunately, until recently it was difficult to decompose economic time series into orthogonal time-scale components except for the short and long run, in which the former is dominated by noise. This paper uses wavelets to produce an orthogonal decomposition of some economic variables by time scale over six different time scales. The relationship of interest is the permanent income hypothesis. We confirm that time-scale decomposition is very important for analyzing economic relationships and that a number of anomalies previously noted in the literature are explained by these means. The analysis indicates the importance of recognizing variations in phase between variables when investigating the economic relationships.

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Article provided by Berkeley Electronic Press in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 3 (1998)
Issue (Month): 1 ()
Pages: 23-42
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Handle: RePEc:bep:sndecm:3:1998:1:23-42

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Related research
Keywords: wavelets time scale permanent-income hypothesis

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Corbae, Dean & Ouliaris, Sam & Phillips, Peter C B, 1994. "A Reexamination of the Consumption Function Using Frequency Domain Regressions," Empirical Economics, Springer, vol. 19(4), pages 595-609.
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  2. Ramsey, J.B. & Lampart, C., 1997. "The Decomposition of Economic Relationships by Time Scale Using Wavelets," Working Papers 97-08, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  3. Ramsey, James B. & Zhang, Zhifeng, 1995. "The Analysis of Foreign Exchange Data Using Waveform Dictionaries," Working Papers 95-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  4. Engle, Robert F, 1974. "Band Spectrum Regression," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 1-11, February. [Downloadable!] (restricted)
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  5. Jensen, Mark J., 2000. "An alternative maximum likelihood estimator of long-memory processes using compactly supported wavelets," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 361-387, March. [Downloadable!] (restricted)
  6. Viard, Alan D, 1993. "The Productivity Slowdown and the Savings Shortfall: A Challenge to the Permanent Income Hypothesis," Economic Inquiry, Oxford University Press, vol. 31(4), pages 549-63, October.
  7. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  8. Charles R. Nelson, 1987. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Molana, H, 1991. "The Time Series Consumption Function: Error Correction, Random Walk and the Steady-State," Economic Journal, Royal Economic Society, vol. 101(406), pages 382-403, May. [Downloadable!] (restricted)
  10. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October. [Downloadable!] (restricted)
  11. Christiano, Lawrence J & Eichenbaum, Martin & Marshall, David, 1991. "The Permanent Income Hypothesis Revisited," Econometrica, Econometric Society, vol. 59(2), pages 397-423, March. [Downloadable!] (restricted)
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  12. Greenblatt, Seth A, 1998. "Atomic Decomposition of Financial Data," Computational Economics, Springer, vol. 12(3), pages 275-93, December. [Downloadable!]
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