Mismeasured personal saving and the permanent income hypothesis

Leonard Nakamura and Tom Stark

No 07-8, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Is it possible to forecast using poorly measured data? According to the permanent income hypothesis, a low personal saving rate should predict rising future income (Campbell, 1987). However, the U.S. personal saving rate is initially poorly measured and has been repeatedly revised upward in benchmark revisions. The authors use both conventional and real-time estimates of the personal saving rate in vector autoregressions to forecast real disposable income; using the level of the personal saving rate in real time would have almost invariably made forecasts worse, but first differences of the personal saving rate are predictive. They also test the lay hypothesis that a low personal saving rate has implications for consumption growth and find no evidence of forecasting ability.

Date: 2007
New Economics Papers: this item is included in nep-for and nep-mac
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