Measuring Noise in the Permanent Income Hypothesis

22 Pages Posted: 30 Mar 2000

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: February 2000

Abstract

Based on a number of 'deviation measures', Kim (1996) finds that postwar US consumption deviates from the Permanent Income Hypothesis (PIH) by only around 4 percent. In the present paper we investigate in more detail the extent to which the PIH provides a good approximation to US consumption data. We point out some unappealing features in the methods suggested by Kim, and we propose a method that does not have these drawbacks. In particular, we argue that due to the non-stationarity that characterizes consumption and income, deviation measures should be expressed in terms of saving rather than consumption. By applying our proposed method we find that in general US saving deviates from PIH saving by substantially more than 4 percent. We also document that the behavior of US consumption in the 1990s has turned saving into a non-stationary process, which is strongly at odds with the PIH.

JEL Classification: E21

Suggested Citation

Engsted, Tom, Measuring Noise in the Permanent Income Hypothesis (February 2000). Available at SSRN: https://ssrn.com/abstract=214792 or http://dx.doi.org/10.2139/ssrn.214792

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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