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Seasonality and the Life‐cycle Permanent Income Hypothesis: Evidence for Australia, the United Kingdom and Germany
Author(s) -
Leong Kenneth
Publication year - 2001
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00120
Subject(s) - economics , consumption (sociology) , seasonality , permanent income hypothesis , econometrics , unit root , demographic economics , habit , seasonal adjustment , life cycle hypothesis , macroeconomics , statistics , mathematics , variable (mathematics) , psychology , mathematical analysis , social science , sociology , psychotherapist
Intra‐year observed consumption displays substantial seasonality. Consumers allocate their non‐durable expenditure over the four quarters of the year, maximising total utility subject to the period‐to‐period budget constraint. Osborn (1988) derives a seasonally‐varying utility function, for which Hall's (1978) consumption function implies a periodic autoregressive model with a unit root. Using quarterly seasonally unadjusted consumption for Australia, the United Kingdom, and Germany, recently developed tests for seasonality and periodicity are used to examine the modified rational expectations life‐cycle permanent income hypothesis and to reinforce previous findings in the literature. Seasonal habit persistence is introduced as an alternative model and its empirical adequacy is found to be significant. Finally, a multivariate test of the excess sensitivity puzzle excludes a predictive role for lagged income changes.