Testing the permanent income hypothesis in the developing and developed countries: A comparison between Fiji and Australia

Abstract

Hall (1978) has stimulated considerable controversy and empirical work on testing the permanent income hypothesis (PIH). Much of the empirical work is on the developed countries where opportunities for inter-temporal substitution are generally higher than in the developing countries. Therefore, it is expected that PIH would be valid for only a smaller proportion of consumers in the developing countries. This paper uses the extended framework of Campbell and Mankiw (1989) to estimate the proportion of consumers for whom PIH is valid in Fiji and Australia. Our results show that PIH consumers are about 40\% higher in Australia than in Fiji