Document Type
Discussion Paper
Publication Date
9-1-1984
CFDP Number
725
CFDP Pages
17
Abstract
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.
Recommended Citation
Mankiw, N. Gregory and Shapiro, Matthew D., "Trends, Random Walks, and Tests of the Permanent Income Hypothesis" (1984). Cowles Foundation Discussion Papers. 965.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/965