Testing for Stochastic Non-Linearity in the Rational Expectations Permanent Income Hypothesis

Iranian Economic Review, Forthcoming

Posted: 14 Aug 1998 Last revised: 4 Oct 2013

See all articles by Saeed Moshiri

Saeed Moshiri

Saint Thomas More College University of Saskatcehwan

Norouz Kohzadi

affiliation not provided to SSRN

Norman Edward Cameron

University of Manitoba - Department of Economics

Date Written: June 1, 1998

Abstract

The Rational Expectations Permanent Income Hypothesis implies that consumption follows a random walk. However, most empirical tests have rejected the hypothesis. Those empirical tests are based on linear models. If the data generating process is non-linear, conventional tests may not be able to pick up some of the randomness. As a result, inference based on conventional tests can be misleading. This paper tests for the presence of stochastic non-linearity in aggregate consumption of non-durable goods and services, using U.S. and Canadian data. The two major tests applied are a test devised by Brock, Dechert, and Scheinkman, and a test based on an Artificial Neural Network model. The results support (do not reject) the hypothesis that there is no non-linearity in the data. The forecast results, however, suggest that even though the linearity hypothesis is not rejected, the non-linear ANN model tends to outperform the ARIMA model over three different horizons.

JEL Classification: C22, C45, C52, E31, E37

Suggested Citation

Moshiri, Saeed and Kohzadi, Norouz and Cameron, Norman Edward, Testing for Stochastic Non-Linearity in the Rational Expectations Permanent Income Hypothesis (June 1, 1998). Iranian Economic Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=115040

Saeed Moshiri (Contact Author)

Saint Thomas More College University of Saskatcehwan ( email )

1437 College Dr
Saskatoon, Saskatchewan S7N 0W6
Canada

Norouz Kohzadi

affiliation not provided to SSRN

Norman Edward Cameron

University of Manitoba - Department of Economics ( email )

Winnipeg, Manitoba R3T 5V5
Canada

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