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Household Saving and Permanent Income in Canada and the United Kingdom

Listed author(s):
  • John Y. Campbell
  • Richard H. Clarida

Recent theoretical research in open-economy macroeconomics has emphasized the connection between a country's current account and the intertemporal savings and investment choices of its households, firms, and governments. In this paper, we assess the empirical relevance of the permanent income theory of household saving, a key building block of recent theoretical models of the current account. Using the econometric approach of Campbell (1987), we are able to reject the theory on quarterly aggregate data in Canada and the United Kingdom. However, we also assess the economic significance of these statistical rejections by comparing the behavior of saving with that of an unrestricted vector autoregressive (VAR) forecast of future changes in disposable labor income. If the theory is true, saving should be the best available predictor of future changes in disposable labor income. We find the correlation between saving and the unrestricted VAR forecast to be extremely high in both countries. The results suggest that the theory provides a useful description of the dynamic behavior of household saving in Canada and Britain.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2223.

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Date of creation: Apr 1987
Publication status: published as Campbell, John Y. and Richard H. Clarida. "Household Saving and Permanent Income in Canada and the United Kingdom," The Economic Consequences of Government Budgets, ed. by E. Helpman, A. Razin and E. Sadka. Cambridge, MA: MI TPress, 1988,.
Handle: RePEc:nbr:nberwo:2223
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