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Revisiting the Empirical Inconsistency of the Permanent Income Hypothesis: Evidence from Rural China

Liping Gao (), Hyeongwoo Kim () and Yaoqi Zhang

No auwp2013-05, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: Chow (1985) reports strong evidence in favor of the permanent income hypothesis (PIH) using observations from 1953 to 1982 in China. We revisit this issue with rural area household data in China during the post economic reform regime (1978-2009) as well as the postwar US data for comparison. Our in-sample analysis provides strong evidence against the PIH for both countries. Out-of-sample forecast exercises also reveal that consumption changes are highly predictable. Our vector autoregressive (VAR) model analysis also shows significantly positive responses of consumption to income shocks, and non-negligible proportions of variations in consumption are explained by innovations in income.

Keywords: Permanent Income Hypothesis; Consumption; Generalized Method of Moments; Diebold-Mariano-West Statistic; Vector Autoregressive (search for similar items in EconPapers)
JEL-codes: E21 E27 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-dev, nep-for and nep-tra
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