testing for stochastic non- linearity in the rational expectations permanent income hypothesis

Testing for Stochastic Non- Linearity in the Rational Expectations Permanent Income Hypothesis

The Rational Expectations Permanent Income Hypothesis implies that consumption follows a martingale. However, most empirical tests have rejected the hypothesis. Those empirical tests are based on linear models. If the data generating process is non-linear, conventional tests may not assess some of the randomness properly. As a result, inference based on conventional tests of linear models can b...

Testing Intertemporal Rational Expectations Model with State Uncertainty: An Application to the Permanent Income Hypothesis

In this paper we take a different modeling approach based on the component driven (CD) model developed in Kuan, Huang, and Tsay (2003) to test the permanent income hypothesis (PIH), an example of intertemporal choice models. A key feature of this approach is that it explicitly allows for state uncertainty. By assuming that the labor income follows a CD process, we show that the agent’s percepti...

TESTING THE RATIONAL EXPECTATIONS HYPOTHESIS IN MACROECONOMETRIC MODELS By

ALTWXGH the assumption that expectations are rational is often made in macroeconometric model building, it is seldom tested. Hall and Henry (1988), for example, use this assumption in a number of equations of their model. but no tests are made against other possible expectational assumptions. The rational expectations (RE) hypothesis has come to be treated like the profit maximization hypothesi...

Using the Permanent Income Hypothesis for Forecasting

P ersonal consumption expenditures grew by almost 2 percent during 1993 in real, per-capita terms. Real disposable income per capita, meanwhile, actually fell slightly. By definition, households draw down their savings when consumption grows faster than income. In fact, the figures for consumption and income just mentioned underlie a decline in the personal savings rate from over 6 percent in t...

Macroeconomic Analysis without the Rational Expectations Hypothesis∗

This paper reviews a variety of alternative approaches to the specification of the expectations of economic decisionmakers in dynamic models, and reconsiders familiar results in the theory of monetary and fiscal policy when one allows for departures from the hypothesis of rational expectations. The various approaches are all illustrated in the context of a common model, a log-linearized New Key...

Testing the Expectations Hypothesis in Continuous-Time