We provide international evidence on the joint behavior of consumption and the real rate of interest and examine the rational expectations restrictions of the permanent income hypothesis. We extend the basic model to allow for independent effects of the stage of the business cycle or a regime shift after 1979. In our eight-country sample (using 1970s-1980s data) we find a small but internationally similar rate of intertemporal substitution once we allow for a regime shift affecting the average growth of consumption after 1979. The rational expectations restrictions are formally rejected, most prominently for the United Kingdom and Japan.

doi.org/10.1007/BF01431975, hdl.handle.net/1765/57162
De Economist
Erasmus School of Economics

Koedijk, K., & Smant, D. (1994). The permanent income hypothesis, business cycles, and regime shifts: Evidence from eight countries. De Economist, 142(3), 307–325. doi:10.1007/BF01431975