Consumption and Fractional Differencing: Old and New Anomalies
This paper calculates the stochastic properties of consumption when income follows a fractionally differenced process. It shows how such a process may resolve Angus Deaton's (1987) excessive smoothness paradox while assuming both the permanent income hypothesis and a univariate process for income. Tests and simulations suggest the evidence is consistent with income following such a process. Copyright 1993 by MIT Press.
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