Date of Award

8-2013

Document Type

Thesis

Degree Name

Master of Arts (MA)

Legacy Department

Economics

Advisor

Baier, Scott

Committee Member

Tamura , Robert

Committee Member

Warren , Patrick

Abstract

The influential work by R. Hall (1987) is replicated with more recent data to test the modified version of the Permanent Income Hypothesis, specifically in testing the predictability and stability of the reduced consumption function. One aspect is to test the implication of the joint permanent income hypothesis with rational expectations is that no other lagged variable other than the previous period's consumption, value of stock prices, and the index of housing prices should be of any use to predict current consumption. The data used are quarterly time series data from 1954-2012. Hall's results are replicated, that the previous period's real disposable income is confirmed to be insignificant in predicting current consumption with the addition to the significance of housing prices. The second aspect is to test whether a reduced consumption function on periods is stable during the significant increases and decreases of housing prices. The paper concludes that the reduced consumption function is indeed stable even during the two separate events.

Included in

Economics Commons

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