The Deaton Paradox in a Long Memory Context with Structural Breaks

28 Pages Posted: 27 Apr 2009 Last revised: 28 Apr 2009

See all articles by Seonghoon Cho

Seonghoon Cho

School of Economics, Yonsei University

Luis A. Gil-Alana

University of Navarra - Department of Economics

Antonio Moreno

School of Economics and Business, University of Navarra

Date Written: April 27, 2009

Abstract

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.

Keywords: Consumption Smoothness, Permanent Income Hypothesis, Long Memory, Structural Breaks, Monthly Frequency

JEL Classification: C12, C22, C32, E21, E32

Suggested Citation

Cho, Seonghoon and Gil-Alana, Luis A. and Moreno, Antonio, The Deaton Paradox in a Long Memory Context with Structural Breaks (April 27, 2009). Available at SSRN: https://ssrn.com/abstract=1395577 or http://dx.doi.org/10.2139/ssrn.1395577

Seonghoon Cho

School of Economics, Yonsei University ( email )

Yonsei University
Seoul
Korea
82-2-2123-2470 (Phone)
82-2-393-1158 (Fax)

HOME PAGE: http://web.yonsei.ac.kr/sc719/index.htm

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

Antonio Moreno (Contact Author)

School of Economics and Business, University of Navarra ( email )

Ed. Amigos
Pamplona, Navarra 31009
Spain

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