Is Consumption Too Smooth? Long Memory and the Deaton Paradox

Francis X. Diebold, Glenn D. Rudebusch
1991 Review of Economics and Statistics  
Under common ARIMA representations of income, the permanent-income hypothesis predicts that the volatility of consumption should be larger than the volatility of unanticipated shocks to income; 'this prediction is not supported by the data. We examine whether this apparent excess smoothness of consumption is the result of the ARIMA representation's implicit restrictions on low-frequency dynamics. By using a generalized long-memory stochastic representation, we construct confidence intervals for
more » ... the long-run impulse response of income in the absence of such lowfrequency restrictions. These intervals are quite wide and include regions in which excess smoothness vanishes.
doi:10.2307/2109680 fatcat:jsirbjaadzab5i2vqzfnoznm2y