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Tests of the Life Cycle-Permanent Income Hypothesis in the Presence of Random Walks: Asymptotic Theory and Small-Sample Interpretations


  • Banerjee, Anindya
  • Dolado, Juan


Recent literature on cointegration and unit roots has focused attention on the distribution of test statistics frequently used to test efficiency in rational expectations models. This paper concentrates on the permanent income hypothesis of real consumption. The authors illustrate, by using the proper asymptotic theory and small-sample approximations, the cases in which tests of such a hypothesis are biased towards rejection and cases where they have the correct sizes. Their results serve to interpret numerous Monte Carlo studies in the literature on this issue. Special emphasis is placed on the distinction between "weak" and "semistrong" rationality tests. Copyright 1988 by Royal Economic Society.

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  • Banerjee, Anindya & Dolado, Juan, 1988. "Tests of the Life Cycle-Permanent Income Hypothesis in the Presence of Random Walks: Asymptotic Theory and Small-Sample Interpretations," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 610-633, December.
  • Handle: RePEc:oup:oxecpp:v:40:y:1988:i:4:p:610-33

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    References listed on IDEAS

    1. Peter Kooreman & Arie Kapteyn, 1990. "On the Empirical Implementation of Some Game Theoretic Models of Household Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 584-598.
    2. Gary S. Becker, 1981. "A Treatise on the Family," NBER Books, National Bureau of Economic Research, Inc, number beck81-1, January.
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    Cited by:

    1. Laurence Bloch & Françoise Maurel, 1991. "Consommation-revenu permanent : un regard d'économètre," Économie et Prévision, Programme National Persée, vol. 99(3), pages 113-144.
    2. Campos, Julia & Ericsson, Neil R. & Hendry, David F., 1996. "Cointegration tests in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 70(1), pages 187-220, January.
    3. Hassler Uwe, 2001. "Wealth and Consumption. A Multicointegrated Model for the Unified Germany / Vermögen und Konsum. Ein multikointegriertes Modell für das vereinigte Deutschland," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(1), pages 32-44, February.

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