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 InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 57.
Date of creation: 1989
Date of revision:
Other versions of this item:
- Diebold, Francis X & Rudebusch, Glenn D, 1991. "Is Consumption Too Smooth? Long Memory and the Deaton Paradox," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 1-9, February.
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