Dynamic Panel Estimation of the Deaton Paradox

This paper estimates the presence of a phenomenon called the Deaton Paradox in Europe. Using the panel data for 24 European countries running from 2000 to 2021 we aim to estimate whether the anomaly of consumption smoothing is present in Europe. In order to do so, we use the generalised method of moments for a dynamic panels estimator. Following the latest literature we use both quarterly and monthly data in order to obtain robust estimates of excessive consumption smoothing. We attempt to broaden our knowledge about the Deaton Paradox in an entirely new direction by using an uncommon combination of European dataset and a generalised method of moments for dynamic panels.Our empirical research of the Deaton Paradox suggests that the Permanent Income Hypothesis framework does not hold in its predictions about consumption smoothing. Hence, the excessive consumption smoothing phenomenon is present in Europe for both monthly and quarterly data