Measuring Noise in the Permanent Income Hypothesis

Posted: 8 Sep 2003

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

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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, although it is possible to come up with a particular version of the PIH that leads to small deviations, in general US saving deviates from PIH saving by substantially more than 4 percent.

Suggested Citation

Engsted, Tom, Measuring Noise in the Permanent Income Hypothesis. Journal of Macroeconomics, Vol. 24, No. 3, Summer 2002. Available at SSRN: https://ssrn.com/abstract=314079

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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