Testing the Implications of the Permanent Income Hypothesis in Sweden
(2009)Department of Economics
- Abstract
- The purpose of this thesis is to test the implications of the permanent income – life cycle hypothesis. According to Hall (1978), if the permanent income-life cycle hypothesis is valid, consumption should follow a random walk and no variable other than once-lagged consumption should help explaining current consumption. Two different tests are conducted. Firstly, consumption is regressed upon its one-period lag and various other lagged variables. Secondly, following the method proposed by Campbell and Mankiw (1990), the alternative that consumption follows a random walk is tested by identifying the fraction of disposable income, rather than permanent income, that is consumed. Both tests reject the permanent income – life cycle hypothesis.... (More)
- The purpose of this thesis is to test the implications of the permanent income – life cycle hypothesis. According to Hall (1978), if the permanent income-life cycle hypothesis is valid, consumption should follow a random walk and no variable other than once-lagged consumption should help explaining current consumption. Two different tests are conducted. Firstly, consumption is regressed upon its one-period lag and various other lagged variables. Secondly, following the method proposed by Campbell and Mankiw (1990), the alternative that consumption follows a random walk is tested by identifying the fraction of disposable income, rather than permanent income, that is consumed. Both tests reject the permanent income – life cycle hypothesis. In addition, the last part of this thesis shows that consumption is cointegrated with wealth and income which implies a long-run relationship between these variables. A short-run model is estimated as well and it is used to forecast consumption for the period 2009-2011. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/1436933
- author
- Dell' Avanzi Neto, Rui
- supervisor
- organization
- year
- 2009
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- consumption, Error correction model, permanent income, disposable income, Economics, econometrics, economic theory, economic systems, economic policy, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
- language
- English
- id
- 1436933
- date added to LUP
- 2009-06-10 00:00:00
- date last changed
- 2010-08-03 10:52:23
@misc{1436933,
abstract = {{The purpose of this thesis is to test the implications of the permanent income – life cycle hypothesis. According to Hall (1978), if the permanent income-life cycle hypothesis is valid, consumption should follow a random walk and no variable other than once-lagged consumption should help explaining current consumption. Two different tests are conducted. Firstly, consumption is regressed upon its one-period lag and various other lagged variables. Secondly, following the method proposed by Campbell and Mankiw (1990), the alternative that consumption follows a random walk is tested by identifying the fraction of disposable income, rather than permanent income, that is consumed. Both tests reject the permanent income – life cycle hypothesis. In addition, the last part of this thesis shows that consumption is cointegrated with wealth and income which implies a long-run relationship between these variables. A short-run model is estimated as well and it is used to forecast consumption for the period 2009-2011.}},
author = {{Dell' Avanzi Neto, Rui}},
language = {{eng}},
note = {{Student Paper}},
title = {{Testing the Implications of the Permanent Income Hypothesis in Sweden}},
year = {{2009}},
}