Empirical Analysis of Rational Expectation and Permanent Income Hypothesis in Lagos State, Nigeria

Abstract

This study empirically analyses the rational expectation and permanent income hypothesis (PIH) in Lagos State, Nigeria using the ordinary least square method to estimate the long-run relationship and parsimonious error correction model to estimate short-run impacts. Our findings show that permanent income influences permanent monthly consumption in the short and long run but permanent monthly income does not impact temporary monthly consumption both in the short and long run. Financial regulation may be necessary to prevent a significant fall in the value of the portfolio of asset holdings by Lagos residents.