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

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

Author Info

Matthew D. Shapiro (Cowles Foundation, Yale University)
N. Gregory Mankiw (MIT)

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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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Publisher Info
Paper provided by Cowles Foundation, 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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Article
- Gregory Mankiw, N. & Shapiro, Matthew D., 1985. "Trends, random walks, and tests of the permanent income hypothesis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 165-174, September. [Downloadable!] (restricted)

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

John Y. Campbell, 1988. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November. [Downloadable!] (restricted)
Lawrence J. Christiano & Martin Eichenbaum & David Marshall, 1987. "The Permanent Income Hypothesis Revisited," NBER Working Papers 2209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Lawrence J. Christiano & Martin Eichenbaum & David Marshall, 1990. "The permanent income hypothesis revisited," Staff Report 129, Federal Reserve Bank of Minneapolis. [Downloadable!]
- Christiano, Lawrence J & Eichenbaum, Martin & Marshall, David, 1991. "The Permanent Income Hypothesis Revisited," Econometrica, Econometric Society, vol. 59(2), pages 397-423, March. [Downloadable!] (restricted)
Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Other versions:
- Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
- Reuven Glick & Kenneth Rogoff, 1992. "Global Versus Country-Specific Productivity Shocks and the Current Account," NBER Working Papers 4140, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
- Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February. [Downloadable!] (restricted)
Charles R. Nelson, 1987. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Matthew D. Shapiro & Joel Slemrod, 2001. "Consumer Response to Tax Rebates," NBER Working Papers 8672, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March. [Downloadable!]
Graham Elliott & James H. Stock, 1992. "Inference in Time Series Regression When the Order of Integration of a Regressor is Unknown," NBER Technical Working Papers 0122, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Elliott, Graham & Stock, James H., 1994. "Inference in Time Series Regression When the Order of Integration of a Regressor is Unknown," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 672-700, August. [Downloadable!]
James H. Stock & Kenneth D. West, 1988. "Integrated Regressors and Tests of the Permanent Income Hypothesis," NBER Working Papers 2359, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Stock, James H. & West, Kenneth D., 1988. "Integrated regressors and tests of the permanent-income hypothesis," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 85-95, January. [Downloadable!] (restricted)
Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1989. "Forecasting the Depression: Harvard Versus Yale," NBER Working Papers 2095, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1986. "Forecasting the Depression: Harvard Versus Yale," Cowles Foundation Discussion Papers 808, Cowles Foundation, Yale University. [Downloadable!]
- Dominguez, Kathryn M & Fair, Ray C & Shapiro, Matthew D, 1988. "Forecasting the Depression: Harvard versus Yale," American Economic Review, American Economic Association, vol. 78(4), pages 595-612, September. [Downloadable!] (restricted)
Kenneth D. West, 1988. "The Insensitivity of Consumption to News About Income," NBER Working Papers 2252, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- West, Kenneth D., 1988. "The insensitivity of consumption to news about income," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 17-33, January. [Downloadable!] (restricted)
David Begg & Stephany Griffith-Jones, 1998. "Swinging since the 60's: Fluctuations in UK Saving and Lessons for Latin America," RES Working Papers 3032, Inter-American Development Bank, Research Department. [Downloadable!]
Brunila, Anne, 1996. "Fiscal Policy and Private Consumption – Saving Decisions: Evidence from Finland," Research Discussion Papers 28/1996, Bank of Finland. [Downloadable!]
Steven N. Durlauf & Peter C.B. Phillips, 1986. "Trends Versus Random Walks in Time Series Analysis," Cowles Foundation Discussion Papers 788, Cowles Foundation, Yale University. [Downloadable!]
Other versions:
- Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, vol. 56(6), pages 1333-54, November. [Downloadable!] (restricted)
Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Marvin Goodfriend, 1991. "Information-aggregation bias," Working Paper 91-06, Federal Reserve Bank of Richmond. [Downloadable!]
Other versions:
- Goodfriend, Marvin, 1992. "Information-Aggregation Bias," American Economic Review, American Economic Association, vol. 82(3), pages 508-19, June. [Downloadable!] (restricted)
Hibbs Jr., Douglas A., 2004. "Voting and the Macroeconomy," Working Papers in Economics 144, Göteborg University, Department of Economics, revised 05 Oct 2004. [Downloadable!]
John Y. Campbell & Robert J. Shiller, 1988. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation, Yale University. [Downloadable!]
- Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
Nicoletti, Giuseppe, 1990. "Consumption And Government Debt In High Deficit Countries: Is Tax-Discounting Stable Over Time? The Case Of Italy And Belgium," Working Papers 90-52, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
Laura Serlenga, . "Three Alternative Approaches to Test the Permanent Income Hypothesis in Dynamic Panels," series 0005, Dipartimento di Scienze Economiche - Università di Bari. [Downloadable!]
YU, Ge, 2005. "Excess Sensitivity of Consumption Using Micro Data in The UK," MPRA Paper 548, University Library of Munich, Germany, revised 2006. [Downloadable!]
Robert J. Shiller, 1985. "Conventional Valuation and the Term Structure of Interest Rates," NBER Working Papers 1610, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

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