Testing the life-cycle permanent income hypothesis using intra-year data for Sweden

Real non-durable consumption expenditure for many countries typically exhib its substantial seasonal fluctuations. In this paper, two seasonal models t hat are consistent with an extension of the rational expectations life-cycl e permanent income hypothesis are evaluated using quarterly seasonally unad justed Swedish consumption expenditure. One model is a first-order periodic ally integrated autoregressive model. Formal procedures for periodic integr ation are used to test this hypothesis. The second model captures seasonal habit persistence in the form of a periodic seasonal ARIMA model. It is fou nd that both models fail to capture adequately the dynamics in Swedish cons umption expenditure, which suggests a rejection of the rational expectation s life-cycle permanent income hypothesis. (C) 1999 IMACS/Elsevier Science B .V. All rights reserved.