Trends, Random Walks, and Tests of the Permanent Income Hypothesis

Matthew D. Shapiro and N. Gregory Mankiw
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Matthew D. Shapiro: Cowles Foundation, Yale University, https://cowles.yale.edu/

No 725, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Recent studies find that consumption is excessively sensitive to income. These studies assume that income is stationary around a deterministic trend. The data, however, do not reject the hypothesis that disposable income is a random walk with drift. If income is indeed a random walk, then the standard testing procedure is greatly biased toward finding excess sensitivity. Moreover, if income is borderline stationary, this procedure is also seriously biased.

Keywords: Non-stationary time series; detrending; permanent income hypothesis; small sample bias (search for similar items in EconPapers)
Pages: 15 pages
Date: 1984-09
Note: CFP 628.
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Citations: View citations in EconPapers (7)

Published in Journal of Monetary Economics (1985), 16: 165-174

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