Testing the Permanent-Income Hypothesis: New Evidence from West-German States (Länder)

Empirical Economics 31:613-629, 2006

Posted: 31 Mar 2013

See all articles by Joseph P. DeJuan

Joseph P. DeJuan

University of Waterloo - Department of Economics

John J. Seater

Economics Dept., Boston College

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: 2006

Abstract

This paper investigates whether time-series data from 11 West-German states (Länder) provide evidence in accord with the implication of the permanent-income hypothesis (PIH) for the stochastic relationship between consumption and income innovations. The empirical results do not support this hypothesis, in the sense that the response of consumption to income innovations is found to be much weaker than is predicted by the PIH. Moreover, for each individual state as well as for Germany as a whole, the response was found to be asymmetric, being stronger for negative than positive income innovations. This evidence of asymmetry is consistent with a model in which consumers are liquidity constrained.

Keywords: Consumption, Permanent Income, West Germany

JEL Classification: E21

Suggested Citation

DeJuan, Joseph P. and Seater, John J. and Wirjanto, Tony S., Testing the Permanent-Income Hypothesis: New Evidence from West-German States (Länder) (2006). Empirical Economics 31:613-629, 2006, Available at SSRN: https://ssrn.com/abstract=2241859

Joseph P. DeJuan

University of Waterloo - Department of Economics ( email )

Waterloo, Ontario N2L 3G1
Canada

John J. Seater

Economics Dept., Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Tony S. Wirjanto (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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