An empirical investigation into the permanent income hypothesis: Further evidence from the Canadian data

Various empirical specifications of the permanent income model are investigated using Canadian aggregate data. Tests for structural changes with known and unknown change point are applied to the models estimated by the generalized method of moments. The proportion of current income individuals is estimated significantly in the range of 0.26-0.29, while the estimates of the intertemporal elasticity of substitution fall in the range of 0.06-0.08 and are statistically significant. Current income consumers appear to respond to labour income with a fraction of lag, and this fraction is significantly estimated at about 0.85. Lastly there appears to be a decline in liquidity constraints that reflects the financial deregulation in the 1980s. However there is no strong evidence to suggest a substantial long-term decline in the importance of liquidity constraints.