Consumption of durable goods and tests of the permanent income hypothesis: evidence from Korean macro data

Abstract

Quarterly aggregate data from Korean urban households is used to test the restrictions on the vector autoregressive (VAR) representation of the permanent income hypothesis (PIH). In testing these restrictions, an alternative consumption measure is proposed which takes account of the flow of services from durable goods. For comparison, two commonly used measures - total consumption expenditures and expenditures on non-durables and services - are also employed in the empirical analysis, and the results show that the choice of consumption measures could have a significant effect on the results of the tests, leading to a false conclusion with the improper consumption variables.