Is Consumption Too Smooth? Long Memory and the Deaton Paradox

Francis Diebold and Glenn Rudebusch

The Review of Economics and Statistics, 1991, vol. 73, issue 1, 1-9

Abstract: Under common ARIMA representations of income, the permanent-income hypothesis predicts that the volatility of consumption should be larger than the volatility of unanticipated shocks to income; this prediction is not supported by the data. The authors examine whether this apparent excess smoothness of consumption is the result of the ARIMA representation's implicit restrictions on low-frequency dynamics. By using a generalized long-memory stochastic representation, the authors construct confidence intervals for the long-run impulse response of income in the absence of such low-frequency restrictions. These intervals are quite wide and include regions in which excess smoothness vanishes. Copyright 1991 by MIT Press.

Date: 1991
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Working Paper: Is consumption too smooth? Long memory and the Deaton paradox (1989)
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