Testing the life-cycle permanent income hypothesis using intra-year data for Sweden

Real non-durable consumption expenditure for many countries typically exhibits substantial seasonal fluctuations. In this paper, two seasonal models that are consistent with an extension of the rational expectations life-cycle permanent income hypothesis are evaluated using quarterly seasonally unadjusted Swedish consumption expenditure. One model is a first-order periodically integrated autoregressive model. Formal procedures for periodic integration are used to test this hypothesis. The second model captures seasonal habit persistence in the form of a periodic seasonal ARIMA model. It is found that both models fail to capture adequately the dynamics in Swedish consumption expenditure, which suggests a rejection of the rational expectations life-cycle permanent income hypothesis. (C) 1999 IMACS/Elsevier Science B.V. All rights reserved.