Testing the Keynesian consumption hypothesis on European panel data

The aim of the paper is to explore to what degree the main hypothesis of the Keynesian model of consumption current real income represents the most important determinant for consumption, in the short run is still valid in current European economies. While there is a fairly extensive economic literature discussing different theoretical versions of this initial model, we believe there is yet not enough empirical evidence to rely upon for clearly accepting or rejecting one of them. The added value of our work is particularly salient in the contemporary context of declining rates of savings, augmented by the extending pressures of overconsumption. The analysis is based on a set of panel data available for 42 European countries, for the time period 2000-2013, including final consumption expenditures as dependent variables, regressed against GDP and a dummy variable for the financial crisis. A random effect model offers the best explanation for the consumption trends depicted by the data, offering a clear quantification for the impact of income: each 1% increase in income results in roughly 0,58% increase in consumption, thus confirming the theory, and also pointing out to the remaining percentage as unobserved individual influences, not correlated with our independent variables.