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The Permanent Income Hypothesis Revisited

66 Pages Posted: 11 Jan 2001  

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

Date Written: April 1987

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.

Suggested Citation

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

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Martin Eichenbaum

Northwestern University ( email )

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Evanston, IL 60208
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847-491-8232 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

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David Aaron Marshall

Federal Reserve Bank of Chicago ( email )

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University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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