We formulate a stylized model that admits volatility ambiguity to the Lucas framework. The model specifies an economically motivated ambiguity penalty function that makes volatility ambiguity quantifiable with χ2-statistics, and allows for analytical solutions. The addition of volatility...

This paper tests the prediction of the Permanent Income Hypothesis (PIH) that news about future income induce a revision in consumption equal to the revision in permanent income. We use time-series data from 48 contiguous US states to perform the test. The empirical results provide some support...

This paper investigates whether time-series data from 11 West-German states (Länder) provide evidence in accord with the implication of the permanent-income hypothesis (PIH) for the stochastic relationship between consumption and income innovations. The empirical results do not support this...