Dynamic Panel Estimation of the Deaton Paradox

This paper estimates the presence of the Deaton paradox in Europe. Using panel data for 24 countries ranging from 2000 to 2021, we estimate the presence of excess smoothness of consumption. We use the generalised method of moments (GMM) estimator. We cluster our dataset, which lowers the data variability, and use both quarterly and monthly data to obtain robust estimates. We broaden our knowledge of the Deaton paradox in a new direction by using a combination of uncommon datasets, GMM and clustering. Our findings indicate that traditional economic theories about consumption may not be applicable. The evident excess smoothness in consumption patterns across Europe provides key insights into consumer behaviour, especially during periods of volatility and instability such as the present. Our research indirectly corroborates newer theories in behavioural economics regarding consumption and places them within a wider macroeconomic context. This has implications for both monetary and fiscal policy. Business and Corporate Implications for Central European audience: The provided insights into the excess smoothness of European consumption patterns are vital for business strategy, particularly in consumer-focused industries. Companies can use these findings to improve forecasting accuracy, optimize inventory and tailor marketing efforts. The relative stability of consumer behaviour, even in economic shifts, suggests opportunities for enhancing brand loyalty and customer retention. Additionally, these insights are crucial for informed investment decisions and pricing strategies in consumer-dependent sectors. Firms can also use this knowledge in policy advocacy, promoting economic decisions that reflect consumer spending trends. Aligning business strategies with these findings not only boosts operational efficiency but also contributes to their economic stability.