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Trends, Random Walks, and Tests of the Permanent Income Hypothesis

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Abstract

Recent studies find that consumption is excessively sensitive to income. These studies assume that income is stationary around a deterministic trend. The data, however, do not reject the hypothesis that disposable income is a random walk with drift. If income is indeed a random walk, then the standard testing procedure is greatly biased toward finding excess sensitivity. Moreover, if income is borderline stationary, this procedure is also seriously biased.

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File URL: http://cowles.econ.yale.edu/P/cd/d07a/d0725.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 725.

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Length: 15 pages
Date of creation: Sep 1984
Date of revision:
Publication status: Published in Journal of Monetary Economics (1985), 16: 165-174
Handle: RePEc:cwl:cwldpp:725

Note: CFP 628.
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Non-stationary time series; detrending; permanent income hypothesis; small sample bias;

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