The permanent income hypothesis: A new framework based on fractional integration and cointegration

Luis Gil-Alana

International Advances in Economic Research, 2004, vol. 10, issue 3, 165-179

Abstract: The issue of the Permanent Income Hypothesis (PIH) is revisited in this paper by examining the relationship between U.S. consumption and income through new statistical techniques based on fractional integration and cointegration. Using a procedure by Robinson [1994a] that permits the testing of I(d) statistical models, the results show that both individual series are I(1). However, the differences seem to be I(d), with d being smaller than 1 in some cases. Also, when performing different regressions of consumption on income, the estimated residuals from the cointegrating regressions appear to be mean reverting. This implies that consumption and income may be fractionally cointegrated, so that deviations from equilibrium are highly persistent. Thus, the results provide further evidence regarding the validity of the PIH for the U.S. Copyright International Atlantic Economic Society 2004

Date: 2004
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DOI: 10.1007/BF02296212

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