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

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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.

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  • Matthew D. Shapiro & N. Gregory Mankiw, 1984. "Trends, Random Walks, and Tests of the Permanent Income Hypothesis," Cowles Foundation Discussion Papers 725, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:725
    Note: CFP 628.
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d07/d0725.pdf
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