02161cam a22002297 4500001000600000003000500006005001700011008004100028100002300069245011400092260006600206490004100272500001700313520124100330530006101571538007201632538003601704710004201740830007601782856003701858856003601895w1687NBER20140901195248.0140901s1985 mau||||fs|||| 000 0 eng d1 aNelson, Charles R.12aA Reappraisal of Recent Tests of the Permanent Income Hypothesish[electronic resource] /cCharles R. Nelson. aCambridge, Mass.bNational Bureau of Economic Researchc1985.1 aNBER working paper seriesvno. w1687 aAugust 1985.3 aHall (1978) showed that the permanent income hypothesis implies that consumption (1) follows a random walk, and (2) cannot be predicted by past income. Reexamination of Hall's data results in rejection of the random walk hypothesis in favor of the alternative hypothesis of positively autocorrelated changes. Evidently this is due to Hall's choice of a quadratic utility function. A logrithmic utility function implies a random walk in the log of consumption which is supported by the data. Hall reported that past income had a negative but insignificant relation to consumption. Changes in the log of income, however, do have a positive predictive relation to changes in the log of consumption. The adjustment of consumption to income seems to be spread over two quarters. Flavin's (1981) test of the theory is formally equivalent to Hall's except for assuming stationarity around a time trend. Mankiw and Shapiro (1984) have pointed out that the effect of detrending may be to tend to rejection of the theory when it is in fact correct. For Hall's data the effect of detrending is to reverse the sign of the coefficient on past income. Its magnitude is what the Mankiw-Shapiro analysis predicts under the permanent income hypothesis. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w1687.4 uhttp://www.nber.org/papers/w168741uhttp://dx.doi.org/10.3386/w1687