The Deaton Paradox in a Long Memory Context with Structural Breaks
28 Pages Posted: 27 Apr 2009 Last revised: 28 Apr 2009
Date Written: April 27, 2009
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
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