A Test of Rational Expectations and the Permanent Income Hypothesis Using Swedish Data 1963–87

  • Curt Wells
  • Stefano Zambelli
  • Shu-Heng Chen


The beginning of the 1970s was the time of rockets to the moon and of the heyday of Keynesian management of the economy. These seemingly dichotomous subjects are related through the art of macroeconomic modelling: if one could but describe the economy carefully enough, the complex relations of the economy would reveal themselves through the model. Then the ability to fine-tune the economy would become a reality. One of the tools that one imagined would be used in this demand management was that of optimal control theory. Thus economists sought the advice of control engineers.


Kalman Filter Granger Causality Disposable Income Rational Expectation Consumption Function 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aoki, Masanao, State Space Modeling of Time Series (Berlin: Springer-Verlag, 1987).CrossRefGoogle Scholar
  2. Athans, Michael, ‘The Discrete Time Linear-Quadratic-Gaussian Stochastic Control Problem’, Annals of Economic and Social Measurement, 1, 14 (1972) pp. 449–92.Google Scholar
  3. Bilson, John F. O., ‘The rational expectations approach to the consumption function: A multi-country study’, European Economic Review, 13 (May 1980) pp. 273–99.CrossRefGoogle Scholar
  4. Flavin, M. A., ‘The Adjustment of Consumption to Changing Expectations About Future Income’, Journal of Political Economy, 89, 5 (1981) pp. 974–1009.CrossRefGoogle Scholar
  5. Friedman, Milton, A Theory of the Consumption Function, National Bureau of Economics Research, Paper No. 63, general series (Princeton, NJ, 1957).Google Scholar
  6. Garbade, Kenneth, ‘Two methods for examining the stability of regression coefficients’, Journal of the American Statistical Association, 72, 357 (March 1977) pp. 54–63.CrossRefGoogle Scholar
  7. Hall, Robert E., ‘Stochastic implications of the life cycle — permanent income hypothesis: theory and evidence’, Journal of Political Economy, 86, 6 (December 1978) pp. 971–87.CrossRefGoogle Scholar
  8. Hansen, L. P. and K. J. Singleton ‘Stochastic consumption, risk aversion, and the temporal behaviour of asset returns’, Journal of Political Economy 91, 2 (1983) pp. 249–65.CrossRefGoogle Scholar
  9. Harvey, A. C., The Econometric Analysis of Time Series (Oxford: Philip Allan, 1981).Google Scholar
  10. Harvey, A. C., ‘Trends and cycles in macroeconomic time series’, Journal of Business and Economic Statistics, 3, 3 (July 1985) pp. 216–27.Google Scholar
  11. Harvey, A. C., ‘Analysis and Generalization of a multivariate exponential smoothing model’, Management Science, 32 (1986) pp. 374–80.CrossRefGoogle Scholar
  12. Harvey, A. C., ‘Forecasting Structural Time Series Models and the Kalman Filter’, (Cambridge University Press, 1989).Google Scholar
  13. Harvey, A. C., B. Henry, S. Peters and S. Wren-Lewis, ‘Stochastic trends in dynamic regression models: an application to the employment-output equation’, Economic Journal, 96, 384 (December 1986) pp. 975–85.CrossRefGoogle Scholar
  14. Harvey, A. C. and J. Durbin, ‘The effects of seat belt legislation on British road casualties: a case study in structural time series modelling’, Journal of the Royal Statistical Society, series A, 14, part 3 (September 1986) pp. 187–227.CrossRefGoogle Scholar
  15. Mankiw, N. G. and M. D. Shapiro, ‘Trends, random walks, and the tests of the Permanent Income Hypothesis’, Journal of Monetary Economics, 16 (September 1985) pp. 165–74.CrossRefGoogle Scholar
  16. Muellbauer, John, ‘Surpnses in the consumption function’, Economic Journal, supplement to vol. 92 (1982) pp. 34–50.Google Scholar
  17. Nelson, C. R., ‘A reappraisal of recent tests of the Permanent Income hypothesis’, Journal of Political Economy, 95, 3 (September 1987) pp. 641–6.CrossRefGoogle Scholar
  18. Palmer, Edward, Determination of Personal Consumption: theoretical foundations and empirical evidence from Sweden (Stockholm: GOTAB, 1981).Google Scholar
  19. STAMP (London: ESRC Centre in Economic Computing, London School of Economics).Google Scholar
  20. Thalberg, Björn, A Trade Cycle Analysis (Lund: Studentlitteratur, 1966).Google Scholar
  21. Thalberg, Björn, (1971b) ‘Stabilization policy and the non-linear theory of the trade cycle’, Swedish Journal of Economics, 73, 3 (September 1971) pp. 294–310.CrossRefGoogle Scholar
  22. Thalberg, Bjöm, (1971a) ‘A note on Phillips’ elementary conclusions on the problems of stabilization policy’, Swedish Journal of Economics, 73, 4 (December 1971) pp. 385–408.CrossRefGoogle Scholar
  23. Weissenberger, Edgar, ‘Consumption innovations and income innovations: the case of the United Kingdom and Germany’, Review of Economics and Statistics, 68 (February 1986) pp. 1–8.CrossRefGoogle Scholar
  24. Barro, R. J., ‘Unanticipated Money Growth and Unemployment in the United States’, American Economic Review (1977) pp. 101–15.Google Scholar
  25. Culter, D. M., J. M. Poterba and L. H. Summers, ‘What Moves Stock Prices?’. Journal of Portofolio Management, 15, 3 (1989) pp. 4–12.CrossRefGoogle Scholar
  26. Engle, R. F., D. F. Hendry and J. F. Richard, ‘Exogeneity’, Econometrica, 51 (1983) pp. 277–304.CrossRefGoogle Scholar
  27. Hall, R. E., ‘Stochastic Implication of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence’, Journal of Political Economy, 86, 6 (1978) pp. 971–87.CrossRefGoogle Scholar
  28. Hall, R. E., ‘Consumption’ in R. Barro (ed.), Modern Business Cycle Theory, (Oxford: Basil Blackwell, 1989).Google Scholar
  29. Harvey, A. C., Forecasting Structural Time Series Models and the Kalman Filter (Cambridge University Press. 1989).Google Scholar
  30. Richard, J.-F., ‘Exogeneity and Control in Econometric Time Series Modelling’ in C. Carraro and D. Sartore (eds), Developments of Control Theory for Economic Analysis (Kluwer Academic Publishers, 1987).Google Scholar
  31. Sargent, T. J., Macroeconomic Theory, 2nd edn (New York: Academic Press. 1986).Google Scholar
  32. Szeto, M., ‘Estimation of the Volatility of Securities in the Stock Market by Kalman Filtering Techniques’, in Proceedings of the 1973 Joint Automat. Contr. Conference (1973) pp. 302–10.Google Scholar

Copyright information

© Kumaraswamy Velupillai 1992

Authors and Affiliations

  • Curt Wells
  • Stefano Zambelli
  • Shu-Heng Chen

There are no affiliations available

Personalised recommendations