Testing the Predictability of Consumption Growth: Evidence from China
Chow (1985, 2010, 2011) reports indirect evidence in favor of the permanent income hypothesis using time series observations in China. We revisit this issue by evaluating direct measures of the predictability of consumption growth in China during the post-economic reform regime (1978-2009) as well as the postwar US data for comparison. Our in-sample analysis provides strong evidence against the PIH for both countries. Out-of-sample forecast exercises show that consumption changes are highly predictable, which sharply contrasts the implication of Chow (1985, 2010, 2011).
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