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2012•Brazilian Business ReviewOpen access

A Direct test of the permanent income hypothesis: the brazilian case

Fábio Augusto Reis Gomes

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Abstract

This paper aims to analyze whether the permanent income hypothesis (PIH) can explain the evolution of consumption in Brazil using a direct test based on consumption revisions induced by income innovations. Under PIH, consumption should react to income changes inasmuch as current income has information about the permanent income. To measure this connection, an ARIMA(p,1,q) model was estimated for current income and, as a result, it was possible to check if revisions in consumption and permanent income are similar. At the end, the PIH was rejected.

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What this paper is about

This paper aims to analyze whether the permanent income hypothesis (PIH) can explain the evolution of consumption in Brazil using a direct test based on consumption revisions induced by income innovations. Under PIH, consumption should react to income changes inasmuch as current income has information about the permanent income. To measure this connection, an ARIMA(p,1,q) model was estimated for current income and, as a result, it was possible to check if revisions in consumption and permanent income are similar. At the end, the PIH was rejected.

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Available abstract

This paper aims to analyze whether the permanent income hypothesis (PIH) can explain the evolution of consumption in Brazil using a direct test based on consumption revisions induced by income innovations. Under PIH, consumption should react to income changes inasmuch as current income has information about the permanent income. To measure this connection, an ARIMA(p,1,q) model was estimated for current income and, as a result, it was possible to check if revisions in consumption and permanent income are similar. At the end, the PIH was rejected.

Key concepts: Permanent income hypothesis, Consumption (sociology), Economics, Passive income, Test (biology), Consumption function, Econometrics, Comprehensive income

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