This paper presents and assessess a procedure to evaluate dynamic, stochastic, general equilibrium macroeconomic models when agents in the economy use an information set superior to that used by researchers.

The Deaton paradox implies that the permanent income hypothesis (PIH) under certainty equivalence is rejected because observed consumption is excessively smooth. It is shown how several reasonable parametrization of the PIH under precautionary saving imply that consumption is smoother than...