Testing the Permanent Income Hypothesis: The Evidence from Canadian Data.

Abstract

This paper investigates whether there are variants of the permanent income model that are consistent with seasonally unadjusted quarterly postwar Canadian data. The analysis is based on a misspecification-test equation which nests the standard permanent income model. The results obtained are somewhat unfavorable to the permanent-income hypothesis. The same results also apply to more general models in which the real interest rate is time-varying and the utility function is nonseparable in consumption and the stock of durable goods.