Is Consumption Too Smooth? Long Memory and the Deaton Paradox
AbstractUnder common ARIMA representations of income, the permanent-income hypothesis predicts that the volatility of consumption should be larger than the volatility of unanticipated shocks to income; this prediction is not supported by the data. The authors examine whether this apparent excess smoothness of consumption is the result of the ARIMA representation's implicit restrictions on low-frequency dynamics. By using a generalized long-memory stochastic representation, the authors construct confidence intervals for the long-run impulse response of income in the absence of such low-frequency restrictions. These intervals are quite wide and include regions in which excess smoothness vanishes. Copyright 1991 by MIT Press.
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Bibliographic InfoArticle provided by MIT Press in its journal Review of Economics & Statistics.
Volume (Year): 73 (1991)
Issue (Month): 1 (February)
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Other versions of this item:
- Francis X. Diebold & Glenn D. Rudebusch, 1989. "Is consumption too smooth? Long memory and the Deaton paradox," Finance and Economics Discussion Series 57, Board of Governors of the Federal Reserve System (U.S.).
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