Testing the empirical relevance of the `saving for a rainy day' hypothesis in US metro areas

André Kallåk Anundsen & Ragnar Nymoen

Photo: Oxford Bulletin of Economics and Statistics

Published in:

Oxford Bulletin of Economics and Statistics, July 2019.

DOI: 10.1111/obes.12310

Abstract

The joint implication of the consumption Euler equation and cointegration between income and consumption is that savings predict future income declines, the ‘saving for a rainy day’ hypothesis. The empirical relevance of this hypothesis plays a key role in discussions of fiscal policy multipliers, and it holds under the null that the permanent income hypothesis is true. We find little support for this hypothesis using time series data for the 100 largest US Metropolitan Statistical Areas for the period 1980q1–2015q4. Our approach is to test for cointegration and weak exogeneity between income and consumption, and by exploring the direction of Granger causality between the two time series. We find that income more often predicts consumption and saving than the converse. We also give evidence that house price changes played a role in US income and consumption dynamics, before, during and after the Great Recession.

Published July 23, 2019 1:59 PM - Last modified July 23, 2019 1:59 PM