Is Consumption Too Smooth? Long Memory and the Deaton Paradox

Francis X. Diebold · Glenn D. Rudebusch

124 citations0/0 files storedThe Review of Economics and Statistics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Under common ARIMA representations of income, the permanent-income hypothesis predicts that the volatility of consumption should be larger than the volatility of unanticipated shocks to income; this prediction is not supported by the data. The authors examine whether this apparent excess smoothness of consumption is the result of the ARIMA representation's implicit restrictions on low-frequency dynamics. By using a generalized long-memory stochastic representation, the authors construct confidence intervals for the long-run impulse response of income in the absence of such low-frequency restrictions. These intervals are quite wide and include regions in which excess smoothness vanishes. Copyright 1991 by MIT Press.

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References

1982Trends and random walks in macroeconmic time series 1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 1983THE ESTIMATION AND APPLICATION OF LONG MEMORY TIME SERIES MODELS 1981The Adjustment of Consumption to Changing Expectations About Future Income 1982The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households 1989Why is Consumption So Smooth?1990Permanent Income, Current Income, and Consumption 1990Consumption puzzles and precautionary savings

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