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http://ssrn.com/abstract=256071
 
 

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The Permanent Income Hypothesis Revisited


Lawrence J. Christiano


Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Martin Eichenbaum


Northwestern University; National Bureau of Economic Research (NBER)

David A. Marshall


Federal Reserve Bank of Chicago; University of Chicago - Booth School of Business

March 1987

NBER Working Paper No. w2209

Abstract:     
This paper investigates whether there are simple versions of the permanent income hypothesis which are consistent with the aggregate U.S. consumption and output data. Our analysis is conducted within the confines of a simple dynamic general equilibrium model of aggregate real output, investment, hours of work and consumption. We study the quantitative importance of two perturbations to the version of our model which predicts that observed consumption follows a random walk: (i) changing the production technology specification which rationalizes the random walk result, and (ii) replacing the assumption that agents' decision intervals coincide with the data sampling interval with the assumption that agents make decisions on a continuous time basis. We find substantially less evidence against the continuous time models than against their discrete time counterparts. In fact neither of the two continuous time models can be rejected at conventional significance levels. The continuous time models outperform their discrete time counterparts primarily because they explicitly account for the fact that the data used to test the models are tine averaged measures of the underlying unobserved point-in-time variables. The net result is that they are better able to accommodate the degree of serial correlation present in the first difference of observed per capita U.S. consumption.

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Date posted: January 11, 2001  

Suggested Citation

Christiano, Lawrence J. and Eichenbaum, Martin and Marshall, David A., The Permanent Income Hypothesis Revisited (March 1987). NBER Working Paper No. w2209. Available at SSRN: http://ssrn.com/abstract=256071

Contact Information

Lawrence J. Christiano (Contact Author)
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8231 (Phone)
847-491-7001 (Fax)
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, OH 44101-1387
United States
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604
United States
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Martin Eichenbaum
Northwestern University ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8232 (Phone)
847-491-7001 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
David Aaron Marshall
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604-1413
United States
312-322-5111 (Phone)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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