DURABILITY AND TESTS OF THE PERMANENT INCOME HYPOTHESIS USING PARTIALLY DISAGGREGATED CONSUMPTION DATA

Since goods classified as non-durable may, in fact, have a durable com ponent, random-walk tests of the permanent income hypothesis using non -durable data series may yield incorrect results. This paper investiga tes this problem by first simulating a model of consumption to show th e effects of durability on statistical tests of non-durable consumptio n models, and then by applying these tests to various disaggregated co nsumption series to determine the effect in practice. The paper finds that there are significant differences in the behaviour of the series within the non-durables and services catagories, and that these differ ences may be related to durability. The effect of this on standard tes ts of consumption is discussed.