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Consumption and Fractional Differencing: Old and New Anomalies

Listed author(s):
  • Haubrich, Joseph G

This paper calculates the stochastic properties of consumption when income follows a fractionally differenced process. It shows how such a process may resolve Angus Deaton's (1987) excessive smoothness paradox while assuming both the permanent income hypothesis and a univariate process for income. Tests and simulations suggest the evidence is consistent with income following such a process. Copyright 1993 by MIT Press.

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 75 (1993)
Issue (Month): 4 (November)
Pages: 767-772

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Handle: RePEc:tpr:restat:v:75:y:1993:i:4:p:767-72
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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. 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 971-987, December.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
  4. 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.
  5. Joseph G. Haubrich & Andrew W. Lo, "undated". "The Sources and Nature of Long-Term Memory in the Business Cycle," Rodney L. White Center for Financial Research Working Papers 05-89, Wharton School Rodney L. White Center for Financial Research.
  6. John Campbell & Angus Deaton, 1989. "Why is Consumption So Smooth?," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 357-373.
  7. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
  8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  9. Quah, Danny, 1990. "Permanent and Transitory Movements in Labor Income: An Explanation for "Excess Smoothness" in Consumption," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 449-475, June.
  10. West, Kenneth D., 1988. "The insensitivity of consumption to news about income," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 17-33, January.
  11. Alan J. Auerbach & Kevin Hassett, 1991. "Corporate Savings and Shareholder Consumption," NBER Chapters,in: National Saving and Economic Performance, pages 75-102 National Bureau of Economic Research, Inc.
  12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  13. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  14. 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.
  15. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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