Paradoxe de Deaton ethabitudes de consommation. Une analyse en termes de mémoire longue

Sandrine Lardic () and Valérie Mignon ()

Revue d'économie politique, 2005, vol. 115, issue 1, 129-160

Abstract: According to the permanent income hypothesis under rational expectations, variations of consumption should be larger than variations of unanticipated shocks to income. This implication of the theoretical model is not supported by the data since there seems to exist an excess smoothness of consumption. This phenomenon has been labeled the Deaton paradox. The purpose of this paper is to study in detail this paradox by retaining an approach in terms of long-term memory (see also Diebold and Rudebusch [1991]). Such an approach is interesting for at least two reasons. Firstly, it enables us to investigate more precisely the dynamics of household income by taking into account its possibly long range behavior. This is very important since the modeling of the income process is crucial for interpreting consumption behavior and evaluating the permanent income hypothesis. Secondly, by the mean of the long-term memory approach, we are able to put forward a link between the Deaton paradox and habit formation. Obtained results suggest that the Deaton paradox is only due to a bad specification of the income process in Germany and Canada, while it is present in France, Great Britain and United States. Moreover this excess smoothness of consumption seems to be the result of habit formation in France and United States.

Keywords: Deaton paradox; habit formation; long-term memory; ARFIMA processes (search for similar items in EconPapers)
Date: 2005
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