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Testing for Excess Sensitivity in Consumption: A State-Space/Unobserved Components Approach

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  • Elwood, S Kirk
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    Abstract

    This paper tests the joint rational expectations/permanent income hypothesis using a state-space/unobserved components model to specify anticipated and unanticipated elements of permanent, transitory, and seasonal components of the income path and measure their relationships with consumption. The results do not find significant excess sensitivity. However, a similar test that accounts for seasonality using X-11 adjusted data does, thus indicating that seasonal filtering may be responsible for previous empirical rejections of the theory. Since the model includes consumption information in estimating the different components of income, it also improves upon univariate investigations of the relative magnitudes of permanent and transitory disturbances to the income path.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 30 (1998)
    Issue (Month): 1 (February)
    Pages: 64-82

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    Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:64-82

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Johansson, Martin W, 2002. "Reexamining loss aversion in aggregate consumption - Swedish and international evidence," Working Papers 2002:2, Lund University, Department of Economics.
    2. Huang, Yu-Lieh & Huang, Chao-Hsi & Kuan, Chung-Ming, 2008. "Reexamining the permanent income hypothesis with uncertainty in permanent and transitory innovation states," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1816-1836, December.
    3. Eliana González & Luis F. Melo & Luis E. Rojas & Brayan Rojas, . "Estimations of the natural rate of interest in Colombia," Borradores de Economia 626, Banco de la Republica de Colombia.
    4. Hasan Bakhshi, 2000. "The sensitivity of aggregate consumption to human wealth," Bank of England working papers 108, Bank of England.
    5. Suzuki, Yui, 2014. "Financial integration and consumption risk sharing and smoothing," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 585-598.

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