It has become something of a stylised fact that the change in consumer spending exhibits persistence. This is often interpreted as indicating a violation of the rational expectations permanent income (RE-PI) hypothesis. This paper considers an alternative interpretation, namely that such persistence reflects portfolio disturbances from the financial sector which temporarily push consumption away from its RE-PI path. Empirical support for this interpretation is provided using a UK data set.
|Name||Dundee Discussion Papers in Economics|
|Publisher||University of Dundee|
- Permanent income
- Wealth allocation
- Portfolio adjustment
- Error correction