EFFECTS OF TRANSITORY CONSUMPTION AND TEMPORAL AGGREGATION ON THE PERMANENT INCOME HYPOTHESIS

This paper shows that U.S. monthly consumption data are consistent wit h the permanent income hypothesis (PIH) when transitory consumption an d temporal aggregation effects are jointly incorporated into the model . In this case, a more appropriate representation for PIH is the integ rated-moving average IMA(1, 1) process with a negative MA coefficient, rather than the repeatedly rejected random walk process. Restrictions on the relative importance of transitory and permanent consumption ar e also discussed, with and without measurement errors.