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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. 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.
  2. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-37, December.
  3. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  4. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  5. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
  6. Kenneth D. West, 1987. "The Insensitivity of Consumption to News About Income," NBER Working Papers 2252, National Bureau of Economic Research, Inc.
  7. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  8. 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.
  9. Quah, D., 1989. "Permanent And Transitory Movements In Labor Income: An Explanation For "Excess Smoothness" In Consumption," Working papers 535, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. 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.
  11. Charles R. Nelson, 1985. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  15. Sydney Ludvigson & Christina H. Paxson, 1997. "Approximation bias in linearized Euler equations," Research Paper 9712, Federal Reserve Bank of New York.
  16. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, August.
  17. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
  18. 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.
  19. Milton Friedman & Simon Kuznets, 1954. "Income from Independent Professional Practice," NBER Books, National Bureau of Economic Research, Inc, number frie54-1, August.
  20. Gali, Jordi, 1991. "Budget Constraints and Time-Series Evidence on Consumption," American Economic Review, American Economic Association, vol. 81(5), pages 1238-53, December.
  21. Matthew D. Shapiro & N. Gregory Mankiw, 1984. "Trends, Random Walks, and Tests of the Permanent Income Hypothesis," Cowles Foundation Discussion Papers 725, Cowles Foundation for Research in Economics, Yale University.
  22. 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.
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