A Reappraisal of Recent Tests of the Permanent Income Hypothesis
Hall (1978) showed that the permanent income hypothesis implies that consumption (1) follows a random walk, and (2) cannot be predicted by past income. Reexamination of Hall's data results in rejection of the random walk hypothesis in favor of the alternative hypothesis of positively autocorrelated changes. Evidently this is due to Hall's choice of a quadratic utility function. A logrithmic utility function implies a random walk in the log of consumption which is supported by the data. Hall reported that past income had a negative but insignificant relation to consumption. Changes in the log of income, however, do have a positive predictive relation to changes in the log of consumption. The adjustment of consumption to income seems to be spread over two quarters. Flavin's (1981) test of the theory is formally equivalent to Hall's except for assuming stationarity around a time trend. Mankiw and Shapiro (1984) have pointed out that the effect of detrending may be to tend to rejection of the theory when it is in fact correct. For Hall's data the effect of detrending is to reverse the sign of the coefficient on past income. Its magnitude is what the Mankiw-Shapiro analysis predicts under the permanent income hypothesis.
|Date of creation:||Aug 1985|
|Publication status:||published as Nelson, Charles R. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," Journal of Political Economy, Vol. 95, No. 3, June 1987, pp. 64 1-646.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1687. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.