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A Reexamination of the Consumption Function Using Frequency Domain Regressors

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Abstract

This paper reexamines the permanent income hypothesis (PIH) in the frequency domain. Using a simple model, we demonstrate that the PIH implies the marginal propensity to consume (MPC) out of zero frequency income is unity. The PIH also implies that the MPC out of transitory (or high frequency) income is smaller than the long-run MPC. The paper employs a systems spectral regression procedure to test the PIH that accommodates stochastic trends in the consumption and income series as well as the joint dependence in these series. Monte Carlo simulations suggest that single equation techniques can produce inefficient tests of the PIH and that systems spectral regression methods provide substantially better tests. New empirical estimates of the consumption function and tests of the PIH based on systems spectral regression methods are reported for U.S. aggregate consumption and income data over the period 1948-1990. The empirical results provide partial support for the theoretical implications of the PIH in the frequency domain.

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File URL: http://cowles.econ.yale.edu/P/cd/d09b/d0997.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 997.

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Length: 18 pages
Date of creation: Oct 1991
Date of revision:
Publication status: Published in Empirical Economics (1994), 19: 595-609
Handle: RePEc:cwl:cwldpp:997

Note: CFP 894.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Web page: http://cowles.econ.yale.edu/
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Keywords: Permanent income; hypothesis; consumption; consumer economics;

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References

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  1. Stock, James H, 1988. "A Reexamination of Friedman's Consumption Puzzle," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(4), pages 401-07, October.
  2. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 407-36, May.
  3. Engle, Robert F, 1974. "Band Spectrum Regression," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 1-11, February.
  4. 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.
  5. Peter C.B. Phillips & Sam Ouliaris & Joon Y. Park, 1988. "Testing for a Unit Root in the Presence of a Maintained Trend," Cowles Foundation Discussion Papers 880, Cowles Foundation for Research in Economics, Yale University.
  6. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  7. John H. Cochrane, 1994. "Univariate vs. Multivariate Forecasts of GNP Growth and Stock Returns: Evidence and Implications for the Persistence of Shocks, Detrending Methods," NBER Working Papers 3427, National Bureau of Economic Research, Inc.
  8. Peter C.B. Phillips, 1988. "Spectral Regression for Cointegrated Time Series," Cowles Foundation Discussion Papers 872, Cowles Foundation for Research in Economics, Yale University.
  9. Geweke, John F. & Singleton, Kenneth J., 1981. "Latent variable models for time series : A frequency domain approach with an application to the permanent income hypothesis," Journal of Econometrics, Elsevier, vol. 17(3), pages 287-304, December.
  10. Cochrane, John H. & Sbordone, Argia M., 1988. "Multivariate estimates of the permanent components of GNP and stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 255-296.
  11. Park, Joon Y, 1992. "Canonical Cointegrating Regressions," Econometrica, Econometric Society, vol. 60(1), pages 119-43, January.
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Citations

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Cited by:
  1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
  2. Maslova, Inga & Onder, Harun & Sanghi, Apurva, 2013. "Growth and volatility analysis using wavelets," Policy Research Working Paper Series 6578, The World Bank.
  3. Kitamura, Yuichi & Phillips, Peter C. B., 1997. "Fully modified IV, GIVE and GMM estimation with possibly non-stationary regressors and instruments," Journal of Econometrics, Elsevier, vol. 80(1), pages 85-123, September.
  4. Peter C.B. Phillips & Binbin Guo & Zhijie Xiao, 2002. "Efficient Regression in Time Series Partial Linear Models," Cowles Foundation Discussion Papers 1363, Cowles Foundation for Research in Economics, Yale University.
  5. Katrin Assenmacher-Wesche & Stefan Gerlach, 2006. "Money Growth, Output Gaps and Inflation at Low and High Frequency: Spectral Estimates for Switzerland," Working Papers 2006-05, Swiss National Bank.
  6. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Interpreting Euro Area Inflation at High and Low Frequencies," CEPR Discussion Papers 5632, C.E.P.R. Discussion Papers.
  7. Xiao, Zhijie & Phillips, Peter C. B., 2002. "Higher order approximations for Wald statistics in time series regressions with integrated processes," Journal of Econometrics, Elsevier, vol. 108(1), pages 157-198, May.
  8. Zhijie Xiao & Peter C.B. Phillips, 1998. "Higher Order Approximations for Wald Statistics in Cointegrating Regressions," Cowles Foundation Discussion Papers 1192, Cowles Foundation for Research in Economics, Yale University.
  9. Xiao, Zhijie & Phillips, Peter C. B., 1998. "Higher-order approximations for frequency domain time series regression," Journal of Econometrics, Elsevier, vol. 86(2), pages 297-336, June.
  10. Woodford, Michael, 2007. "Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy?," CEPR Discussion Papers 6447, C.E.P.R. Discussion Papers.

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