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Three Alternative Approaches to Test the Permanent Income Hypothesis in Dynamic Panels

  • Laura Serlenga

    ()

    (University of Bari)

In this paper we consider three alternative approaches to test the Permanent Income Hypothesis (PIH) in the context of dynamic panels: the aggregate consumption approach, the Euler equation approach and finally Friedman (1957)'s original characteristic tests. Our empirical evidence, using the British Household Panel Survey (BHPS) data, strongly supports the PIH. This analysis can, thus, be considered as supporting the view that empirical tests of PIH, based on aggregate time-series data, might suffer from misspecification or overlook some fundamental characteristics of micro data.

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File URL: http://www.dse.uniba.it/Quaderni/SERIES/WP_0005.pdf
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Paper provided by Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari in its series series with number 0005.

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Length: 813
Date of creation: Feb 2002
Date of revision: Feb 2002
Handle: RePEc:bai:series:wp0005
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  1. Sydney Ludvigson & Christina H. Paxson, 1997. "Approximation bias in linearized Euler equations," Research Paper 9712, Federal Reserve Bank of New York.
  2. West, Kenneth D., 1988. "The insensitivity of consumption to news about income," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 17-33, January.
  3. 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.
  4. Campbell, John & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Scholarly Articles 3221494, Harvard University Department of Economics.
  5. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
  6. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  7. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
  8. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
  9. Orazio P. Attanasio & Martin Browning, 1993. "Consumption over the Life Cycle and over the Business Cycle," NBER Working Papers 4453, National Bureau of Economic Research, Inc.
  10. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  11. Mariger, Randall P & Shaw, Kathryn, 1993. "Unanticipated Aggregate Disturbances and Tests of the Life-Cycle Consumption Model Using Panel Data," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 48-56, February.
  12. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  13. 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 449-75, June.
  14. Oxley, Les & McAleer, Michael, 1993. " Econometric Issues in Macroeconomic Models with Generated Regressors," Journal of Economic Surveys, Wiley Blackwell, vol. 7(1), pages 1-40.
  15. Gali, Jordi, 1991. "Budget Constraints and Time-Series Evidence on Consumption," American Economic Review, American Economic Association, vol. 81(5), pages 1238-53, December.
  16. Robertson, D & Symons, J, 1992. "Some Strange Properties of Panel Data Estimators," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 175-89, April-Jun.
  17. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  18. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
  19. Charles R. Nelson, 1985. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc.
  20. 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.
  21. Kim, Jinbang & De Marchi, Neil & Morgan, Mary S., 1995. "Empirical model particularities and belief in the natural rate hypothesis," Journal of Econometrics, Elsevier, vol. 67(1), pages 81-102, May.
  22. Milton Friedman & Simon Kuznets, 1954. "Income from Independent Professional Practice," NBER Books, National Bureau of Economic Research, Inc, number frie54-1, October.
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