The Deaton paradox in a long memory context with structural breaks

Luis Gil-Alana, Antonio Moreno () and Seonghoon Cho

Applied Economics, 2012, vol. 44, issue 25, 3309-3322

Abstract: This article contributes to the Permanent Income Hypothesis (PIH) and excess consumption smoothness debate in the context of fractional integration. We show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in the empirical work. In fact, the I (1) hypothesis is rejected for the income process with monthly data in favour of a fractional integration order lower than 1. Moreover, if a structural break is taken into account, we observe a substantial reduction in the degree of consumption smoothness, especially after the break found in 1975.

Date: 2012
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Related works:
Working Paper: The Deaton paradox in a long memory context with structural breaks (2011)
Working Paper: The Deaton paradox in a long memory context with structural breaks (2009)
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DOI: 10.1080/00036846.2011.572857

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