The Deaton paradox in a long memory context with structural breaks

Luis Alberiko Gil-Alana (1) , Antonio Moreno (2) , Seonghoon Cho (3)

1 Faculty of Economics
2 Economics
3 Economics

This paper contributes to the permanent income hypothesis (PIH) and excess consumption smoothness debate 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 the 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.

Mots clés: Social Sciences & Humanities

Domaines: Économie et finance quantitative [q-fin]

Luis Alberiko Gil-Alana, Antonio Moreno, Seonghoon Cho. The Deaton paradox in a long memory context with structural breaks. Applied Economics, 2011, pp.1. ⟨10.1080/00036846.2011.572857⟩. ⟨hal-00711450⟩