Structural stability of the rational expectations - permanent income hypothesis: evidence from Yugoslavia

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Jeffrey A. Mills
James E. Payne

Abstract

This paper evaluates the structural stability of alternative specifications of the rational expectations - permanent income hypothesis (REPIH) with regard to Yugoslav consumption in the 1980s. Evidence is presented to suggest that a carefully specified REPIH structural model of consumption is stable throughout the 1980s, whereas single equation reduced from consumption functions are not. This suggests that the recent decline in aggregate consumer expenditures in Yugoslavia is largely explained by declining real per capita income and not by an exogenously determined shift in consumer preferences.

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