COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 997 "A Reexamination of the Consumption Function Using Frequency Domain Regressions" Dean Corbae, Peter C.B. Phillips and Sam Ouliaris October 1991 This paper reexamines the permanent income hypothesis (PIH) in the frequency domain. Using a simple model, we demonstrate that the PIH implies the marginal propensity to consume (MPC) out of zero frequency income is unity. The PIH also implies that the MPC out of transitory (or high frequency) income is smaller than the long-run MPC. The paper employs a systems spectral regression procedure to test the PIH that accommodates stochastic trends in the consumption and income series as well as the joint dependence in these series. Monte Carlo simulations suggest that single equation techniques can produce inefficient tests of the PIH and that systems spectral regression methods provide substantially better tests. New empirical estimates of the consumption function and tests of the PIH based on systems spectral regression methods are reported for U.S. aggregate consumption and income data over the period 1948-1990. The empirical results provide partial support for the theoretical implications of the PIH in the frequency domain. Keywords: Permanent income, hypothesis, consumption, consumer economics JE Classification: D91, D12, E21, E27 |
