Does Permanent Income Hypothesis Hold for Some Selected African Countries? Empirical Evidence

This paper empirically examines the validity of the Permanent Income Hypothesis for six developing African countries: Cameroon, Ghana, Kenya, Nigeria, Senegal, and South Africa. The study uses the modified Dickey-Fuller unit root (GLS) test to determine stationarity of real income and consumption. It also applies Gregory and Hansen (1996) test for cointegration, and Phillips and Hansen (1990) fully modified OLS (FMOLS) procedure for the estimation of their long-run relationship. The results show that the Permanent Income Hypothesis holds in five of the six countries. One of the policy implications is that only permanent fiscal or monetary policy change will have a permanent impact on spending and aggregate demand in five of the six countries. Discretionary policies which impact real income and credit rationing within these economies will have economic stabilization implications, especially for aggregate spending and economic growth, depending on how temporary or permanent the people view the policies.