AN EMPIRICAL STUDY OF THE LIFE CYCLE - PERMANENT INCOME HYPOTHESIS

Abstract

This paper studies empirically an interesting topic in macroeconomics, the life cycle - permanent income hypothesis. Regression analyses are carried out employing aggregate time series data of seven countries, namely, Canada, France, West Germany, Japan, United Kingdom, United States of America and Singapore. The main source of data is the International Financial Statistics published by the International Monetary Fund. The empirical results are surprisingly simple and consistent across the board - the hypothesis that consumption obeys a random walk is supported. In particular, it is shown that lagged income. change in lagged income, change in lagged consumption, and change in lagged wealth have no significant impact on current consumption( Ct), once lagged consumption( Ct _ 1 ) is included in the basic regression model.