AN EVALUATION OF PERMANENT INCOME/RATIONAL EXPECTATIONS HYPOTHESIS : A CASE OF SELECTED ASEAN ECONOMIES

Abstract

Permanent Income /Rational Expectations Hypothesis is the latest development in consumer theory. Its simple conclusion is that consumption moves in a random walk with trend. This suggests that government stabilizing policies are ineffective in manipulating aggregate demand through consumption. Two reasons that will lead to the rejection of the hypothesis are liquidity constraint and non-optimal distribution of approximation of income. Liquidity constraint is prevalent in developing economies but evidence from People's Republic of China raises doubts on the invalidity of the applicability of the hypothesis in such economies. This paper attempts to find further evidence of PI/REH on Asean economies. No study on the hypothesis using data from Asean countries has been attempted. This paper uses data from five Asean countries, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. The evidence from this paper varies across the economies. There are no statistical evidence that reject the hypothesis in the Singapore case. However, both Thailand and Philippines strongly rejects it. On the other hand, Indonesia and Malaysia do not provide conclusive evidence on the hypothesis.