Advanced

Testing the Implications of the Permanent Income Hypothesis in Sweden

Dell' Avanzi Neto, Rui (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:
author
Dell' Avanzi Neto, Rui
supervisor
organization
year
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},
  keyword      = {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     = {eng},
  note         = {Student Paper},
  title        = {Testing the Implications of the Permanent Income Hypothesis in Sweden},
  year         = {2009},
}