The Deaton paradox in a long memory context with structural breaks
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WPnull/09 The Deaton paradox in a long memory context with structural breaks
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Abstract This paper contributes to the permanent income hypothesis (PIH) and excess consumption smoothness discussion in the context of fractional integration. We show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in empirical work. In fact, the I(1) hypothesis is rejected for the income process with monthly data in favor of a fractional integration order lower than 1. Moreover, if a structural break is taken into account, we observe a substantial reduction in the degree of consumption smoothness, especially after the break found in 1975.
Classification JEL:C12, C22, C32, E21, E32
Keywords:Consumption Smoothness, Permanent Income Hypothesis, Long Memory, Structural Breaks, Monthly Frequen
Number of Pages:30
Creation Date:2009-04-27
Number:null/09
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