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Seasonal Fluctuations and the Life Cycle-Permanent Income Model of Consumption

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  • Miron, Jeffrey A

Abstract

Recent empirical work has found that both aggregate and micro data reject the rational expectations version of the Life Cycle-Permanent Income model of consumption. This paper examines a new possible explanation for the rejections: the treatment of seasonal fluctuations. There are substantial seasonal fluctuations in consumption purchases, but no previous paper has determined whether these fluctuations are consistent with the Life Cycle-Permanent Income model. The results in this paper show that when the seasonal fluctuations in consumption purchases are included in an analysis of the Life Cycle-Permanent Income model there is no evidence in the aggregate data against the model. The estimates of the parameters of agents' utility functions obtained here are plausible, and the data do not reject the overidentifying restrictions on the model.

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File URL: http://dx.doi.org/10.1086/261432
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 94 (1986)
Issue (Month): 6 (December)
Pages: 1258-79

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Handle: RePEc:ucp:jpolec:v:94:y:1986:i:6:p:1258-79
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  18. Mervyn A. King, 1983. "The Economics of Saving," NBER Working Papers 1247, National Bureau of Economic Research, Inc.
  19. 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.
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