How forecastable is consumption growth? New evidence on the Hall random walk hypothesis

I provide new evidence on the accuracy of the Hall random walk hypothesis that consumption growth is not predictable. Using 1971-94 US data, I find that consumption growth is substantially more predictable than previously believed. A regression of consumption growth on lagged nominal interest rate c...

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Bibliographic Details
Published in:Applied economics 1997-11, Vol.29 (11), p.1435-1446
Main Author: Viard, Alan D.
Format: Article
Language:English
Subjects:
Applied economics
Consumption
Consumption patterns
Consumption theory
Data analysis
Disposable income
Economic forecasting
Economic growth
Economic theory
Forecasts
Hypotheses
Income
Interest rates
Random walk theory
Statistical analysis
Studies
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Summary:I provide new evidence on the accuracy of the Hall random walk hypothesis that consumption growth is not predictable. Using 1971-94 US data, I find that consumption growth is substantially more predictable than previously believed. A regression of consumption growth on lagged nominal interest rate changes, lagged consumption growth and forecasts by Data Resources, Inc. yields an adjusted R-squared of 0.32. The empirical tests further suggest that excess sensitivity of consumption to current disposable income, rather than time-varying real interest rates or non-separable utility, is the most likely explanation for the predictability of consumption growth.
ISSN:0003-6846
1466-4283
DOI:10.1080/000368497326264