Macroeconomic Dynamics

Table of Contents - 1999 - Volume 3, Issue 01  


DETECTION AND MODELING OF REGRESSION PARAMETER VARIATION ACROSS FREQUENCIES

(WITH AN APPLICATION TO TESTING THE PERMANENT INCOME HYPOTHESIS)

Hui Boon Tan a1c1 and Richard Ashley a2
a1 Universiti Putra Malaysia
a2 Virginia Polytechnic Institute and State University

Abstract

A simple technique for directly testing the parameters of a time-series regression model for instability across frequencies is presented. The method can be implemented easily in the time domain, so that parameter instability across frequency bands can be conveniently detected and modeled in conjunction with other econometric features of the problem at hand, such as simultaneity, cointegration, missing observations, and cross-equation restrictions. The usefulness of the new technique is illustrated with an application to a cointegrated consumption-income regression model, yielding a straightforward test of the permanent income hypothesis.


Key Words: Permanent Income; Parameter Variation; Frequency Domain.

Correspondence:
c1 Address correspondence to: Richard Ashley, Department of Economics (0316), Virginia Polytechnic Institute and State University, Blacksburg, VA 24061, USA; e-mail: ashleyr@vt.edu