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PIH and ROT alternative in view of the intertemporal non-separability of preferences: empirical findings from a Japanese panel data

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  • Yoshitsugu Kitazawa

    ()
    (Faculty of Economics, Kyushu Sangyo University)

  • Makoto Ohta

    (Waseda Graduate School of Finance, Accounting and Law)

Abstract

This paper describes an empirical investigation into the permanent income hypothesis (PIH) and the rule-of-thumb (ROT) alternative hypothesis, both of which allow for the intertemporal non-separability of preferences in the sense that past consumption of the PIH consumers has influence on their current utility. The data used in this study is a Japanese aggregate panel data processed with the Family Income and Expenditure Survey (FIES) for the period 1981-2002, and the GMM estimations for the panel data are carried out for spans within the period. The results demonstrate that the PIH holds for the bubble span 1988-1993 and the serious deflation span 1997-2002, while the ROT alternative holds for the post-bubble depression span 1993-1998.

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File URL: http://www.ip.kyusan-u.ac.jp/keizai-kiyo/dp25.pdf
File Function: First version, 2005
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Bibliographic Info

Paper provided by Kyushu Sangyo University, Faculty of Economics in its series Discussion Papers with number 25.

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Length: 26 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:kyu:dpaper:25

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Keywords: Permanent income hypothesis; Rule-of-thumb alternative hypothesis; Intertemporal non-separability of preferences; Panel data; Generalized method of moments;

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References

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  1. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
  2. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
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  4. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  5. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
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  10. Alessie, Rob & Lusardi, Annamaria, 1997. "Consumption, saving and habit formation," Economics Letters, Elsevier, vol. 55(1), pages 103-108, August.
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  13. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  14. Weber, Christian E., 2002. "Intertemporal non-separability and "rule of thumb" consumption," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 293-308, March.
  15. Hayashi, Fumio, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1083-1113, November.
  16. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  17. Yih-Luan Chyi & Chao-Hsi Huang, 1997. "An empirical study of the 'rule of thumb' consumption model in five East Asian countries," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1271-1282.
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