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Sensitivity of Consumption to Current Income in Developıng Countries: An Empirical Reinvestigation of Absolute Income Hypothesis

Year 2018, Volume: 27 Issue: 1, 48 - 62, 15.04.2018

Abstract

The main purpose of this
study is to estimate the Keynesian Absolute Income Hypothesis using panel data from
developing countries classified by income groups and regions. In accordance
with this purpose, fixed and random effects are used as estimators. The results
suggest that current income level is a significant determinant of current consumption
expenditures which means that Keynesian consumption function is still valid for
developing countries. Besides, marginal and average propensities to consume are
smaller than 1 as expected and decreasing from low towards upper-middle income
countries. Regionally, the highest marginal and average propensities to consume
are estimated for Africa region as expected.

References

  • Ando, A. & Modigliani, F. (1963). The “life cycle” hypothesis of saving: Aggregate implications and tests. The American Economic Review, 53(1), 55-84. Asteriou, D. & Hall, S.G. (2011). Applied econometrics. Palgrave Macmillan. Attfield, C., Demery, D. & Duck, N. (1991). Rational expectations in macroeconomics: An introduction to theory and evidence. Wiley-Blackwell. Baltagi, B. (2005). Econometric analysis of panel data (3rd ed). John Wiley & Sons. Berg, E. (2013). Are poor people credit-constraint or myopic? Evidence from a South African panel. Journal of Development Economics, 101, 195-205. Bilgili, F. (2006). Random walk, excess smoothness or excess sensitivity? Evidence from literature and an application for Turkish economy. Brady, D.S. & Friedman, R.D. (1947). PART IV: Savings and The Income Distribution. In Studies in income and wealth (pp. 247-265). NBER. Breusch, T.S. & Pagan, A.R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239-253. Brooks, C. (2008). Introductory econometrics for finance. Cambridge University Press. Campbell, J.Y. & Mankiw, N.G. (1990). Permanent income, current income, and consumption. Journal of Business & Economic Statistics, 8(3), 265-279. Chyi, Y.L. & Huang, C.H. (1997). An empirical study of the ‘rule of thumb’ consumption model in five East Asian countries. Applied Economics, 29(10). 1271-1282. Corbo, V. & Schmidt-Hebbel, K. (1991). Public policies and saving in developing countries. Journal of Development Economics, 36(1), 89-115. Duesenberry, J.S. (1949). Income, saving and the theory of consumer behavior. Harvard University Press. Flavin, M. A. (1981). The adjustment of consumption to changing expectations about future income. Journal of Political Economy, 89(5), 974-1009. Friedman, M. (1957). A theory of the consumption function. Princeton University Press. Gan, W.B. & Soon, L.Y. (1994). Rational expectations, saving and anticipated changes in income: Evidence from Malaysia and Singapore. Journal of Macroeconomics, 16(1), 157-170. Gujarati, D.N. & Porter, D. (2012). Temel ekonometri (Ü.Şenesen ve G. Günlük Şenesen, Çev.). Literatür Yayıncılık. Hall, R.E. (1978). Stochastic implications of the life cycle-permanent income hypothesis: Theory and evidence. Journal of Political Economy, 86(6), 971-987. Haque, N.U. & Montiel, P. (1989). Consumption in developing countries: Tests for liquidity constraints and finite horizons. The Review of Economics and Statistics, 71(3), 408-415. Hatzinikolaou, D. (1999). Modelling consumption: permanent-income or rule-of –behaviour?. Economic Modelling, 16(2), 293-306. Heim, J.J. (2007). Was Keynes right? Does current year disposable income drive consumption spending? (No. 0710). Rensselaer Polytechnic Institute, Department of Economics. Honda, Y. (1985). Testing the error components model with non-normal disturbances. The Review of Economic Studies, 52(4), 681-690. Keynes, J.M. (1936). The general theory of employment, interest and money. Harcourt, Brace & World, Inc. Kuznets, S. (1952). Long‐term changes in the national income of the United States of America since 1870. Review of Income and Wealth, 2(1), 29-241. Kuznets, S. (1952). Proportion of capital formation to national product. The American Economic Review, 42(2), 507-526. Lee, H.K. & Kong, M.K. (2000). Consumption of durable goods and tests of the permanent income hypothesis: evidence from Korean macro data. Applied Economics, 32(1), 39-44. Lee, J.J. & Sawada, Y. (2010). Precautionary saving under liquidity constraints: Evidence from rural Pakistan. Journal of Development Economics, 91(1), 77-86. Mankiw, N.G. (2009). Macroeconomics. Worth Publishers. Modigliani, F. (1986). Life cycle, individual thrift, and the wealth of nations. The American Economic Review, 76(3), 297-313. Molana, H. (1991). The time series consumption function: Error correction, random walk and the steady-state. The Economic Journal, 101(406), 382-403. Patnaik, I. (1997). Poverty, excess sensitivity and the permanent income hypothesis: evidence from a developing country. Applied Economics Letters, 4(8), 521-524. Paz, L.S. & Gomes, F.A.R. (2008). Consumption in South America: myopia or liquidity constraints? Insper Working Paper, 156. Ramsey, F. P. (1928). A Mathematical Theory of Saving. The Economic Journal, 38(152), 543-559. Rao, B.B. & Sharma, K.L. (2008). Testing the permanent income hypothesis in the developing and developed countries: A comparison between Fiji and Australia. International Journal of Applied Business and Economic Research, 6(2), 97-106. Shahbaz, M., Nawaz, K., Arouri, M., Teulon, F. & Uddin, G.S. (2013). Does the Keynesian absolute income hypothesis exist In Pakistan. Economic Modelling, 35(2013), 290-296. Yang, W. (2011). Per capita consumption function for China: An Empirical Exercise. Journal of Global Economy, 7(1), 52-57. Zhang, Y. & Wan, G.H. (2004). Liquidity constraint, uncertainty and household consumption in China. Applied Economics, 36(19), 2221-2229.
Year 2018, Volume: 27 Issue: 1, 48 - 62, 15.04.2018

Abstract

References

  • Ando, A. & Modigliani, F. (1963). The “life cycle” hypothesis of saving: Aggregate implications and tests. The American Economic Review, 53(1), 55-84. Asteriou, D. & Hall, S.G. (2011). Applied econometrics. Palgrave Macmillan. Attfield, C., Demery, D. & Duck, N. (1991). Rational expectations in macroeconomics: An introduction to theory and evidence. Wiley-Blackwell. Baltagi, B. (2005). Econometric analysis of panel data (3rd ed). John Wiley & Sons. Berg, E. (2013). Are poor people credit-constraint or myopic? Evidence from a South African panel. Journal of Development Economics, 101, 195-205. Bilgili, F. (2006). Random walk, excess smoothness or excess sensitivity? Evidence from literature and an application for Turkish economy. Brady, D.S. & Friedman, R.D. (1947). PART IV: Savings and The Income Distribution. In Studies in income and wealth (pp. 247-265). NBER. Breusch, T.S. & Pagan, A.R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239-253. Brooks, C. (2008). Introductory econometrics for finance. Cambridge University Press. Campbell, J.Y. & Mankiw, N.G. (1990). Permanent income, current income, and consumption. Journal of Business & Economic Statistics, 8(3), 265-279. Chyi, Y.L. & Huang, C.H. (1997). An empirical study of the ‘rule of thumb’ consumption model in five East Asian countries. Applied Economics, 29(10). 1271-1282. Corbo, V. & Schmidt-Hebbel, K. (1991). Public policies and saving in developing countries. Journal of Development Economics, 36(1), 89-115. Duesenberry, J.S. (1949). Income, saving and the theory of consumer behavior. Harvard University Press. Flavin, M. A. (1981). The adjustment of consumption to changing expectations about future income. Journal of Political Economy, 89(5), 974-1009. Friedman, M. (1957). A theory of the consumption function. Princeton University Press. Gan, W.B. & Soon, L.Y. (1994). Rational expectations, saving and anticipated changes in income: Evidence from Malaysia and Singapore. Journal of Macroeconomics, 16(1), 157-170. Gujarati, D.N. & Porter, D. (2012). Temel ekonometri (Ü.Şenesen ve G. Günlük Şenesen, Çev.). Literatür Yayıncılık. Hall, R.E. (1978). Stochastic implications of the life cycle-permanent income hypothesis: Theory and evidence. Journal of Political Economy, 86(6), 971-987. Haque, N.U. & Montiel, P. (1989). Consumption in developing countries: Tests for liquidity constraints and finite horizons. The Review of Economics and Statistics, 71(3), 408-415. Hatzinikolaou, D. (1999). Modelling consumption: permanent-income or rule-of –behaviour?. Economic Modelling, 16(2), 293-306. Heim, J.J. (2007). Was Keynes right? Does current year disposable income drive consumption spending? (No. 0710). Rensselaer Polytechnic Institute, Department of Economics. Honda, Y. (1985). Testing the error components model with non-normal disturbances. The Review of Economic Studies, 52(4), 681-690. Keynes, J.M. (1936). The general theory of employment, interest and money. Harcourt, Brace & World, Inc. Kuznets, S. (1952). Long‐term changes in the national income of the United States of America since 1870. Review of Income and Wealth, 2(1), 29-241. Kuznets, S. (1952). Proportion of capital formation to national product. The American Economic Review, 42(2), 507-526. Lee, H.K. & Kong, M.K. (2000). Consumption of durable goods and tests of the permanent income hypothesis: evidence from Korean macro data. Applied Economics, 32(1), 39-44. Lee, J.J. & Sawada, Y. (2010). Precautionary saving under liquidity constraints: Evidence from rural Pakistan. Journal of Development Economics, 91(1), 77-86. Mankiw, N.G. (2009). Macroeconomics. Worth Publishers. Modigliani, F. (1986). Life cycle, individual thrift, and the wealth of nations. The American Economic Review, 76(3), 297-313. Molana, H. (1991). The time series consumption function: Error correction, random walk and the steady-state. The Economic Journal, 101(406), 382-403. Patnaik, I. (1997). Poverty, excess sensitivity and the permanent income hypothesis: evidence from a developing country. Applied Economics Letters, 4(8), 521-524. Paz, L.S. & Gomes, F.A.R. (2008). Consumption in South America: myopia or liquidity constraints? Insper Working Paper, 156. Ramsey, F. P. (1928). A Mathematical Theory of Saving. The Economic Journal, 38(152), 543-559. Rao, B.B. & Sharma, K.L. (2008). Testing the permanent income hypothesis in the developing and developed countries: A comparison between Fiji and Australia. International Journal of Applied Business and Economic Research, 6(2), 97-106. Shahbaz, M., Nawaz, K., Arouri, M., Teulon, F. & Uddin, G.S. (2013). Does the Keynesian absolute income hypothesis exist In Pakistan. Economic Modelling, 35(2013), 290-296. Yang, W. (2011). Per capita consumption function for China: An Empirical Exercise. Journal of Global Economy, 7(1), 52-57. Zhang, Y. & Wan, G.H. (2004). Liquidity constraint, uncertainty and household consumption in China. Applied Economics, 36(19), 2221-2229.
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Details

Primary Language Turkish
Journal Section Makaleler
Authors

İpek Tekin

Publication Date April 15, 2018
Submission Date January 9, 2017
Published in Issue Year 2018 Volume: 27 Issue: 1

Cite

APA Tekin, İ. (2018). Sensitivity of Consumption to Current Income in Developıng Countries: An Empirical Reinvestigation of Absolute Income Hypothesis. Çukurova Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 27(1), 48-62.