Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-06T11:51:18.450Z Has data issue: false hasContentIssue false
  • English
  • Français

The Life Cycle Hypothesis and Rational Expectations: Some Further Empirical Results

Published online by Cambridge University Press:  17 August 2016

R. MacDonald  and
D.A. Peel
R. MacDonald
Affiliation:
(University of Aberdeen)
D.A. Peel
Affiliation:
(University of Aberystwyth)
Get access

Extract

In an innovative and important paper Hall (1978) demonstrated that the assumption of rational expectations when applied to the life cycle or permanent income hypothesis would, given a number of further assumptions such as constancy of the real rate of interest, imply that real consumption follows a martingale. Thus in logarithms

log C - log C- 1 = α + ∊

where C is real consumer expenditure, α is a constant which allows for real growth in the economy and ∊ is a white noise error term.

Hall presented empirical evidence for the U.S. economy which was broadly consistent with the hypothesis. However, subsequent work by a number of authors (eg Muellbauer (1983) and Hendry and von Ungern-Sternberg (1980)) appears to be inconsistent with the hypothesis. Past values of economic variables, such as consumption or income, are significant determinants of the first difference of the logarithm of consumption which violates the hypothesis.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 49 , Issue 4 , December 1983 , pp. 381 - 390
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1983 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Baille, R.T., Lippens, R.E. and McMahon, P.C. (1983), Testing Rational Expectations and Efficiency in the Foreign Exchange Market, Econometrica, 51, pp. 553–563.Google Scholar
Bailey, R.W., Baillie, R.T. and Mcmahon, P.C. (1984), Interpreting Econometric Evidence on Efficiency in the Foreign Exchange Market, Oxford Economic Papers, 36, pp. 67–85.Google Scholar
Barro, R.J. (1977), Unanticipated Money Growth and Unemployment in the United States, A merican Economic Review, 67, pp. 101–115.Google Scholar
Deaton, A.S. (1977), Involuntary Saving through Unanticipated Inflation, American Economic Review, 67, pp. 899–910.Google Scholar
Flavin, M.A. (1981), The Adjustment of Consumption to Changing Expectations about Future Income, Journal of Political Economy, 89, pp. 974–1009.Google Scholar
Hall, R.E. (1978), Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence, Journal of Political Economy, 86, pp. 971–87.Google Scholar
Harvey, A.C. (1981), Time Series Models, Philip Alan Publishers Ltd., Deddington.Google Scholar
Hendry, D.F. and Von Ungern-Sternberg, T. (1980), Liquidity and Inflation Effects on Consumers Expenditure, in (ed). Deaton, A.S. Essays in the Theory and Measurement of Consumers Behaviour, Cambridge University Press.Google Scholar
Holden, K., and Peel, D.A. (1984), Surprises in the Consumption Function, Incomplete Current Information and Moving Average Errors : A Note, mimeo, University of Liverpool.Google Scholar
Judge, G.G., Griffiths, W.E., Carter Hill, R. and Lee, T.C. (1980), The Theory and Practice of Econometrics, John WILEY and Sons, New York.Google Scholar
McDonald, J. and Darroch, J.(1983), Consistant Estimation of Equations with Composite Moving Average Disturbance Terms, Journal of Econometrics, 23, pp.253–67.Google Scholar
McDonald, R., (1984), Tests of Efficiency and the Impact of «News» in Three Foreign Exchange Markets: The Experience of the 1920s, Bulletin of Economic Research, 35, 2, pp. 123–144.Google Scholar
Nelson, C.R. (1975), Rational Expectations and the Predictive Efficiency of Economic Models, Journal of Business, 43, pp. 331–343.Google Scholar
Wickens, M.R. and Molana, H.(1983), Stochastic Life Cycle Theory with Varying Interest Rates and Prices, Economic Journal, Supplement A.U.T.E. proceedings.Google Scholar
Zellner, A. (1962), An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Dias, Journal of the American Statistical Association, 57, pp. 348–368.Google Scholar