Trends, Random Walks, and Tests of the Permanent Income Hypothesis

Recent studies find that consumption is excessively sensitive to income. These studies assume that income is stationary around a deterministic trend. The data, however, do not reject the hypothesis that disposable income is a random walk with drift. If income is indeed a random walk, then the standard testing procedure is greatly biased toward finding excess sensitivity. Moreover, if income is borderline stationary, this procedure is also seriously biased.

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Year of publication:	1984-09
Authors:	Shapiro, Matthew D. ; Mankiw, N. Gregory
Institutions:	Cowles Foundation for Research in Economics, Yale University
Subject:	Non-stationary time series \| detrending \| permanent income hypothesis \| small sample bias

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Extent:	application/pdf
Series:	Cowles Foundation Discussion Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	CFP 628. Published in Journal of Monetary Economics (1985), 16: 165-174 The price is None Number 725 15 pages
Source:	RePEc - Research Papers in Economics

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