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The Deaton paradox in a long memory context with structural breaks

Listed author(s):
  • Luis A. Gil-Alana

    ()

    (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra)

  • Antonio Moreno

    ()

    (Facultad de Ciencias Económicas y Empresariales, Universidad de Navarra)

  • Seonghoon Cho

    ()

This paper contributes to the permanent income hypothesis (PIH) and excess consumption smoothness debate in the context of fractional integration. We show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in empirical work. In fact, the I(1) hypothesis is rejected for the income process with monthly data in favor of a fractional integration order lower than 1. Moreover, if a structural break is taken into account, we observe a substantial reduction in the degree of consumption smoothness, especially after the break found in 1975.

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File URL: http://www.unav.edu/documents/10174/6546776/1273740108_WP_UNAV_03_09.pdf
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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 03/09.

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Length: 30 pages
Date of creation: 27 Apr 2009
Handle: RePEc:una:unccee:wp0309
Contact details of provider: Web page: http://www.unav.edu/web/facultad-de-ciencias-economicas-y-empresariales

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