Seasonality and the Life‐cycle Permanent Income Hypothesis: Evidence for Australia, the United Kingdom and Germany

Intra‐year observed consumption displays substantial seasonality. Consumers allocate their non‐durable expenditure over the four quarters of the year, maximising total utility subject to the period‐to‐period budget constraint. Osborn (1988) derives a seasonally‐varying utility function, for which Hall's (1978) consumption function implies a periodic autoregressive model with a unit root. Using quarterly seasonally unadjusted consumption for Australia, the United Kingdom, and Germany, recently developed tests for seasonality and periodicity are used to examine the modified rational expectations life‐cycle permanent income hypothesis and to reinforce previous findings in the literature. Seasonal habit persistence is introduced as an alternative model and its empirical adequacy is found to be significant. Finally, a multivariate test of the excess sensitivity puzzle excludes a predictive role for lagged income changes.