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Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis

  • Campbell, John Y

The permanent income hypothesis implies that people save because they rationally expect their permanent income to decline; they save "for a rainy day." It follows that saving should be at l east as good a predictor of declines in labor income as any other for ecast that can be constructed from publicly available information. Th e paper tests this hitherto ignored implication of the permanent inco me hypothesis, using quarterly aggregate data for the period 1953-84 in the United States. By contrast with much of the recent literature, the results here are valid when income is stationary in first differ ences rather than levels. Copyright 1987 by The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 55 (1987)
Issue (Month): 6 (November)
Pages: 1249-73

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Handle: RePEc:ecm:emetrp:v:55:y:1987:i:6:p:1249-73
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  1. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December.
  2. Bernanke, Ben, 1985. "Adjustment costs, durables, and aggregate consumption," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 41-68, January.
  3. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  4. Davidson, James E. H. & Hendry, David F., 1981. "Interpreting econometric evidence : The behaviour of consumers' expenditure in the UK," European Economic Review, Elsevier, vol. 16(1), pages 177-192.
  5. 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.
  6. Sawa, Takamitsu, 1978. "Information Criteria for Discriminating among Alternative Regression Models," Econometrica, Econometric Society, vol. 46(6), pages 1273-91, November.
  7. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  8. Lars Peter Hansen & Thomas J. Sargent, 1980. "Linear rational expectations models for dynamically interrelated variables," Working Papers 135, Federal Reserve Bank of Minneapolis.
  9. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
  10. Sargent, Thomas J, 1978. "Rational Expectations, Econometric Exogeneity, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 673-700, August.
  11. Mervyn A. King, 1983. "The Economics of Saving," NBER Working Papers 1247, National Bureau of Economic Research, Inc.
  12. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  13. 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.
  14. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
  15. Baillie, Richard T & Lippens, Robert E & McMahon, Patrick C, 1983. "Testing Rational Expectations and Efficiency in the Foreign Exchange Market," Econometrica, Econometric Society, vol. 51(3), pages 553-63, May.
  16. Charles R. Nelson, 1985. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc.
  17. Muellbauer, John, 1983. "Surprises in the Consumption Function," Economic Journal, Royal Economic Society, vol. 93(369a), pages 34-50, Supplemen.
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