This article contributes to the Permanent Income Hypothesis (PIH) and excess consumption smoothness debate in the context of fractional integration. We show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in the empirical work. In fact, the I(1) hypothesis is rejected for the income process with monthly data in favour of a fractional integration order lower than 1. Moreover, if a structural break is taken into account, we observe a substantial reduction in the degree of consumption smoothness, especially after the break found in 1975.
Bibliographical noteFunding Information:
L.A. Gil-Alana and A. Moreno gratefully acknowledge the financial support from the Spanish Ministerio de Ciencia y Tecnologia (ECO2008-03035, ECO2009-11151 ECON Y FINANZAS, respectively). Comments from the Editor and from two anonymous referees are gratefully acknowledged.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics