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A Cross-country Test of the Permanent Income Hypothesis

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  • Joseph De Juan
  • John Seater

Abstract

The Permanent Income Hypothesis (PIH) predicts an income innovation has the same size effect on consumption as on permanent income, an implication we examine with a cross-country test proposed by Kormendi & LaHaye (1984). The data from industrial countries support PIH but data from developing countries do not. Also, however, data from countries with high quality national income accounts support PIH whereas data from countries with low quality accounts do not. The stage of economic development and data quality are highly correlated. The evidence suggests that the results may be driven primarily by data quality differences rather than systematically different behaviour between industrial and developing countries.

Suggested Citation

  • Joseph De Juan & John Seater, 1997. "A Cross-country Test of the Permanent Income Hypothesis," International Review of Applied Economics, Taylor & Francis Journals, vol. 11(3), pages 451-468.
    • Handle: RePEc:taf:irapec:v:11:y:1997:i:3:p:451-468
    DOI: 10.1080/02692179700000029
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    1. Saima Liaqat & Marguerite Wotto & Khalid Khan, 2020. "Estimation of Consumption Function for Developing Economies: China, Turkey, Vietnam and Bangladesh," Global Economics Review, Humanity Only, vol. 5(1), pages 1-11, March.
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    3. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    4. Salman Ahmed Shaikh & Mohd Adib Ismail & Abdul Ghafar Ismail & Shahida Shahimi & Muhammad Hakimi Mohd. Shafiai, 2018. "An Empirical Investigation Of Consumption Behaviour In Selected Oic Countries," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 4(1), pages 101-116, August.

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