PIH and ROT alternative in view of the intertemporal non-separability of preferences: empirical findings from a Japanese panel data

This paper describes an empirical investigation into the permanent income hypothesis (PIH) and the rule-of-thumb (ROT) alternative hypothesis, both of which allow for the intertemporal non-separability of preferences in the sense that past consumption of the PIH consumers has influence on their current utility. The data used in this study is a Japanese aggregate panel data processed with the Family Income and Expenditure Survey (FIES) for the period 1981-2002, and the GMM estimations for the panel data are carried out for spans within the period. The results demonstrate that the PIH holds for the bubble span 1988-1993 and the serious deflation span 1997-2002, while the ROT alternative holds for the post-bubble depression span 1993-1998.