TY  - JOUR
AU  - Campbell,John Y.
AU  - Clarida,Richard H.
TI  - Household Saving and Permanent Income in Canada and the United Kingdom
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2223
PY  - 1987
Y2  - April 1987
UR  - http://www.nber.org/papers/w2223
L1  - http://www.nber.org/papers/w2223.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Richard H. Clarida
Columbia University
420 West 118th Street
Room 1111, IAB
New York, NY  10027
Tel: 212/854-3676
Fax: 212/854-8059
E-Mail: rhc2@columbia.edu
AB  - Recent theoretical research in open-economy macroeconomics has emphasized the connection between a country's current account and the intertemporal savings and investment choices of its households, firms, and governments. In this paper, we assess the empirical relevance of the permanent income theory of household saving, a key building block of recent theoretical models of the current account. Using the econometric approach of Campbell (1987), we are able to reject the theory on quarterly aggregate data in Canada and the United Kingdom. However, we also assess the economic significance of these statistical rejections by comparing the behavior of saving with that of an unrestricted vector autoregressive (VAR) forecast of future changes in disposable labor income. If the theory is true, saving should be the best available predictor of future changes in disposable labor income. We find the correlation between saving and the unrestricted VAR forecast to be extremely high in both countries. The results suggest that the theory provides a useful description of the dynamic behavior of household saving in Canada and Britain.
ER  -