DOES HOUSEHOLD CONSUMPTION BEHAVE AS A MARTINGALE - A TEST FOR RURAL SOUTH-INDIA

The hypothesis that consumption evolves over time as a martingale proc ess is tested on household panel data for three villages in south Indi a. A novel feature of the methodology is that it gives consistent esti mates of dynamic effects in short panels. The estimated coefficients o f lagged consumption are generally smaller than unity and a number of the lagged income and wealth variables are statistically significant. The results are inconsistent with the proposition that consumption equ als permanent income. This is also true when the data are disaggregate d by household wealth.