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

Matthew Shapiro and N. Gregory Mankiw ()

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)
Date: 1984-09
Note: CFP 628.
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Published in Journal of Monetary Economics (1985), 16: 165-174

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