A Comparative Study on Consumption Functions: The Case of the European Union*

Abstract

The consumption function describes the relationship between consumption expenditures and income. As is well known, the distribution of macroeconomic data such as income and consumption is unequal. Accordingly, estimators derived from linear models may be inefficient. This study attempted to reach efficient estimators, using gamma distribution, within the limits of this study. The main purpose of this study is to estimate parameters of mainstream consumption functions using the panel-data of EU members and negotiating countries. Using data from the World Bank, the European Union Macroeconomic Database (AMECO), and the Bank of International Settlement (BIS), consumption functions were estimated by the Generalized Linear Model (GLM) approach. The reliability of the estimators was tested with the Generalized Moments Method (GMM). Furthermore, the study uses GLM, based on machine learning, to obtain robust estimators for overfitting. Findings of all three methods are compatible with each other and the “Permanent Income” hypothesis verified.

Keywords

• Consumption Function
• Marginal Propensity to Consume
• Absolute Income Hypothesis
• Life-cycle Hypothesis

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