IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v29y1997i11p1435-1446.html
   My bibliography  Save this article

How forecastable is consumption growth? New evidence on the Hall random walk hypothesis

Author

Listed:
  • Alan Viard

Abstract

I provide new evidence on the accuracy of the Hall random walk hypothesis that consumption growth is not predictable. Using 1971-94 US data, I find that consumption growth is substantially more predictable than previously believed. A regression of consumption growth on lagged nominal interest rate changes, lagged consumption growth and forecasts by Data Resources, Inc. yields an adjusted R-squared of 0.32. The empirical tests further suggest that excess sensitivity of consumption to current disposable income, rather than time-varying real interest rates or non-separable utility, is the most likely explanation for the predictability of consumption growth.

Suggested Citation

  • Alan Viard, 1997. "How forecastable is consumption growth? New evidence on the Hall random walk hypothesis," Applied Economics, Taylor & Francis Journals, vol. 29(11), pages 1435-1446.
    • Handle: RePEc:taf:applec:v:29:y:1997:i:11:p:1435-1446
    DOI: 10.1080/000368497326264
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/000368497326264
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/000368497326264?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    3. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    4. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    5. repec:fth:harver:1435 is not listed on IDEAS
    6. Charles R. Bean, 1986. "The Estimation of "Surprise" Models and the "Surprise" Consumption Function," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(4), pages 497-516.
    7. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    8. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-1273, November.
    9. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    10. Christopher D. Carroll, 1994. "How does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 111-147.
    11. Stock, James H. & West, Kenneth D., 1988. "Integrated regressors and tests of the permanent-income hypothesis," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 85-95, January.
    12. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-692, December.
    13. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November.
    14. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    15. Gregory Mankiw, N. & Shapiro, Matthew D., 1985. "Trends, random walks, and tests of the permanent income hypothesis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 165-174, September.
    16. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
    17. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-279, July.
    18. Bernanke, Ben, 1985. "Adjustment costs, durables, and aggregate consumption," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 41-68, January.
    19. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    20. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
    21. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
    22. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 225-251.
    23. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
    24. Evans, Paul & Karras, Georgios, 1996. "Private and government consumption with liquidity constraints," Journal of International Money and Finance, Elsevier, vol. 15(2), pages 255-266, April.
    25. Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311.
    26. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    2. repec:idn:jimfjn:v:4:y:2018:i:1f:p:1-16 is not listed on IDEAS
    3. Jin Xu & Dongmin Kong, 2015. "Understanding The Household Consumption Behavior In Urban China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(05), pages 1-21, December.
    4. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    5. Salman Ahmed Shaikh & Mohd Adib Ismail & Abdul Ghafar Ismail & Shahida Shahimi & Muhammad Hakimi Mohd. Shafiai, 2018. "An Empirical Investigation Of Consumption Behaviour In Selected Oic Countries," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 4(1), pages 101-116, August.
    6. Fuad Hasanov, 2005. "Housing, Household Portfolio, and Intertemporal Elasticity of Substitution: Evidence from the Consumer Expenditure Survey," Macroeconomics 0510011, University Library of Munich, Germany.
    7. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    8. Hamid Baghestani, 2013. "Evaluating Federal Reserve predictions of growth in consumer spending," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1637-1646, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
    2. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    3. Brunila, Anne, 1997. "Current income and private consumption : Saving decisions : Testing the finite horizon model," Research Discussion Papers 6/1997, Bank of Finland.
    4. repec:zbw:bofrdp:1997_006 is not listed on IDEAS
    5. Brunila, Anne, 1997. "Current income and private consumption: Saving decisions: Testing the finite horizon model," Bank of Finland Research Discussion Papers 6/1997, Bank of Finland.
    6. Gomes, Fábio Augusto Reis & Ribeiro, Priscila Fernandes, 2015. "Estimating the elasticity of intertemporal substitution taking into account the precautionary savings motive," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 108-123.
    7. Hahm, Joon-Ho, 1998. "Consumption adjustment to real interest rates: Intertemporal substitution revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 293-320, February.
    8. Sarno, Lucio & Taylor, Mark P., 1998. "Real Interest Rates, Liquidity Constraints and Financial Deregulation: Private Consumption Behavior in the U.K," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 221-242, April.
    9. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    10. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    11. Daria Pignalosa, 2019. "On the role of the utility function in the estimation of preference parameters," Metroeconomica, Wiley Blackwell, vol. 70(4), pages 793-820, November.
    12. Hansen, Hermann-Josef, 1996. "Der Einfluß der Zinsen auf den privaten Verbrauch in Deutschland," Discussion Paper Series 1: Economic Studies 1996,03, Deutsche Bundesbank.
    13. Daria Pignalosa, 2021. "The Euler Equation Approach: Critical Implications of Recent Developments in the Theory of Intertemporal Choice," Bulletin of Political Economy, Bulletin of Political Economy, vol. 15(1), pages 1-43, June.
    14. Hansen, Hermann-Josef, 1996. "The impact of interest rates on private consumption in Germany," Discussion Paper Series 1: Economic Studies 1996,03e, Deutsche Bundesbank.
    15. Bowman, David & Minehart, Deborah & Rabin, Matthew, 1999. "Loss aversion in a consumption-savings model," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 155-178, February.
    16. Brunila, Anne, 1996. "Fiscal policy and private consumption: Saving decisions: Evidence from Finland," Bank of Finland Research Discussion Papers 28/1996, Bank of Finland.
    17. repec:zbw:bofrdp:1996_028 is not listed on IDEAS
    18. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    19. Cavalcanti, Carlos B., 1993. "Intertemporal Substitution in Consumption: An American Investigation for Brazil," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 13(2), November.
    20. Brunila, Anne, 1996. "Fiscal policy and private consumption : Saving decisions : Evidence from Finland," Research Discussion Papers 28/1996, Bank of Finland.
    21. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23, April.
    22. Yulei Luo & William T. Smith & Heng-fu Zou, 2009. "The Spirit of Capitalism and Excess Smoothness," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 281-301, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:29:y:1997:i:11:p:1435-1446. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.