Trends, Random Walks, and Tests of the Permanent Income Hypothesis
Recent studies find that consumption is excessively sensitive to income. These studies assume that income is stationary around a deterministic trend. The data, however, do not reject the hypothesis that disposable income is a random walk with drift. If income is indeed a random walk, then the standard testing procedure is greatly biased toward finding excess sensitivity. Moreover, if income is borderline stationary, this procedure is also seriously biased.
|Date of creation:||Sep 1984|
|Date of revision:|
|Publication status:||Published in Journal of Monetary Economics (1985), 16: 165-174|
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