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Three Alternative Approaches to Test the Permanent Income Hypothesis in Dynamic Panels

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Author Info
Laura Serlenga () (Dipartimento di Scienze Economiche - Università di Bari)
Abstract

In this paper we consider three alternative approaches to test the Permanent Income Hypothesis (PIH) in the context of dynamic panels: the aggregate consumption approach, the Euler equation approach and Þnally Friedman (1957)’s original characteristic tests. Our empirical evidence, using the British Household Panel Survey (BHPS) data, strongly supports the PIH. This analysis can, thus, be considered as supporting the view that empirical tests of PIH, based on aggregate time-series data, might suffer from misspeciÞcation or overlook some fundamental characteristics of micro data.

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Paper provided by Dipartimento di Scienze Economiche - Università di Bari in its series series with number 0005.

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Handle: RePEc:bai:series:wp0005

Note: I wish to thank Dr. Yongcheol Shin for his constant and precious guide, Prof. Gary Koop and Dr. Andy Snell for their help. My thanks are also owed to Prof. Hassan Molana who was my discussant at the SDP Methodological Conference (Crieff, January 2001) where the previous version of this paper has been presented. I am grateful to Dr. Ahmed Anwar, Prof. John Moore, Dr. Jozsef Sakovics and the SDP workshop participants at the University of Edinburgh for the helpful comments on an earlier version of this paper. All the remaining errors are solely my own responsibility.
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Related research
Keywords: Permanent Income Hypothesis; British Household Panel Survey;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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  7. Robertson, D & Symons, J, 1992. "Some Strange Properties of Panel Data Estimators," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 175-89, April-Jun. [Downloadable!] (restricted)
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  15. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
  16. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February. [Downloadable!] (restricted)
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  18. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  19. Quah, D., 1989. "Permanent And Transitory Movements In Labor Income: An Explanation For "Excess Smoothness" In Consumption," Working papers 535, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  20. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
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