Does Permanent Income Hypothesis Hold for African Countries? An Empirical Evidence

This paper examines the validity of the permanent income hypothesis for a group of 12 African countries using cointegration procedures. Specifically, this paper utilizes the bounds cointegration test proposed by Pesaran et al. (2001) and the C/S procedure advanced by Gregory and Hansen (1996). In addition, the study implements the fully modified OLS model (FMOLS) to determine the long-run relationship between consumption and income. The results from the study suggest that (a) there is a long-run relationship between consumption and income and (b) real income is an important determinant of consumption. Above all, the study finds that the relationship between consumption and real income is structurally stable for most of the sample countries. In all, the results indicate that innovations in real income have implications for consumption for the sample countries.