Dynamics of Aggregate Demand Factors in Macro Growth: An European Perspective

The present study examines whether demand factors cause volatility in the economic growth of European Union (EU) with 28 member countries for the data from 1995 to 2016. The relative significance of household final consumption spending, investment, government spending and net exports has been tested by estimating linear regression model, running variance decomposition and applying impulse response function. Results indicate that all the four demand factors seem to be significant in the economic growth of EU. The consumption spending of the households influences the economic growth in the short run to medium run. While, investment and net exports are very significant to sustain growth in the medium to long run. It also appears from the result that too much interventions of national governments in Europe will de-stabilise the economic growth. It could be inferred that the sharp decline in the consumption spending of the households in Europe was the immediate cause of prolonged economic slowdown since 2008 which trickles down the investment, affects net exports and derails economic growth. Thus, the revival of marginal propensity to consume is the key factor for revival of European economy.