Both the permanent-income hypothesis and
the life-cycle hypothesis predict that consumption
is less volatile than income. Using the
St. Louis Federal Reserve Bank’s FRED
database
(http://research.stlouisfed.org/fred2/)
evaluate this prediction for the United States.
a. Download quarterly data for real consumption
(PCECC96) and real GDP (GDPC1)
from 1947 to the present and calculate the
compound average annual growth rates for
both data series.
b. Economists often measure the volatility of
a data series using the standard deviation.
Calculate the standard deviation of both
consumption and GDP.
c. Are the results in part (b) consistent with
the permanent-income hypothesis and the
life-cycle hypothesis? Briefly explain.