IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/65787.html
   My bibliography  Save this paper

Estimating Consumption function under Permanent Income Hypothesis: A comparison between Nigeria and South Africa

Author

Listed:
  • Alimi, R. Santos

Abstract

The aim of this study was to estimate the consumption function of Nigeria and South Africa under the Permanent Income Hypothesis using a time series data on final household consumption expenditure, real GDP and real interest rate from 1980 to 2013. The study estimated parameter MPC long run time series employing Cagan’s adaptive expectation model. The result shows exist of a long run relationship between consumption and income for the two countries. Data for Nigeria suggested that the behavior of consumers in Nigeria is forward looking in the sense that their consumption behavior is based on expected future income while in case of South Africa, the study showed that past consumption has effect on current consumption as posited by Duesenberry in the Relative income hypothesis in South Africa. Moreso, it was revealed that the behavior of consumers in South African is also forward-looking although not as much as Nigerians. The policy implication of these findings is that the impact of government policy of tax reductions will be greater on consumption if such a policy is perceived by consumers as permanent. Thus, a tax cuts aimed at the bottom of the income distribution are likely to be more expansionary than tax cuts aimed at the top.

Suggested Citation

  • Alimi, R. Santos, 2015. "Estimating Consumption function under Permanent Income Hypothesis: A comparison between Nigeria and South Africa," MPRA Paper 65787, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:65787
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/65787/3/MPRA_paper_65787.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Jones, Yakama Manty, 2013. "Testing the foreign aid-led growth hypothesis in West Africa," MPRA Paper 50361, University Library of Munich, Germany.
    3. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    4. Rangan Gupta & Emmanuel Ziramba, 2009. "Is the Permanent Income Hypothesis Really Well-Suited for Forecasting?," Working Papers 200909, University of Pretoria, Department of Economics.
    5. Joseph DeJuan & John Seater & Tony Wirjanto, 2006. "Testing the permanent-income hypothesis: new evidence from West-German states ( Länder)," Empirical Economics, Springer, vol. 31(3), pages 613-629, September.
    6. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, May.
    7. Yakama Manty Jones, 2013. "Testing the Foreign Aid-led Growth Hypothesis in West Africa," Management Working Papers 3, Birkbeck Department of Management, revised Apr 2013.
    8. Lourenco Senne Paz, 2006. "Consumption in Brazil: myopia or liquidity constraints? A simple test using quarterly data," Applied Economics Letters, Taylor & Francis Journals, vol. 13(15), pages 961-964.
    9. Frank Barry & Michael B. Devereux, 1992. "An examination of the "expansionary fiscal contraction" hypothesis," Working Papers 199206, School of Economics, University College Dublin.
    10. Joseph P. Dejuan & John J. Seater, 2006. "A Simple Test of Friedman's Permanent Income Hypothesis," Economica, London School of Economics and Political Science, vol. 73(289), pages 27-46, February.
    11. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    12. Alimi, R. Santos, 2013. "Keynes' Absolute Income Hypothesis and Kuznets Paradox," MPRA Paper 49310, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Syed AMMAD* & Qazi Masood AHMED**, 2018. "AGGREGATE CONSUMPTION IN PAKISTAN: Revisiting the Permanent-Income Hypothesis under Adaptive Expectation Model," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 28(1), pages 33-46.
    2. Bah, Ibrahim Abubakarr, 2022. "Assessing Sierra Leone’s Consumption Function: A Cointegration and an Error Correction Model Approach," EconStor Preprints 266912, ZBW - Leibniz Information Centre for Economics.
    3. Tazeb Bisset & Dagmawe Tenaw, 2022. "Keeping up with the Joneses: macro-evidence on the relevance of Duesenberry’s relative income hypothesis in Ethiopia," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 24(2), pages 549-564, December.
    4. Nwanne, Nkem, 2017. "An Examination of the Neutrality of US Money Supply on the Nigerian Economy," MPRA Paper 82227, University Library of Munich, Germany.
    5. Hiroaki Hayakawa, 2020. "Consumer behavior in a monetary economy and smoothing of composite consumption," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(1), pages 89-122, March.
    6. Hiroaki Hayakawa, 2019. "Time Preferences, Intertemporal Optimization, and the Permanent Income-Life Cycle Hypothesis," Growth, Asian Online Journal Publishing Group, vol. 6(1), pages 1-11.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tazeb Bisset & Dagmawe Tenaw, 2022. "Keeping up with the Joneses: macro-evidence on the relevance of Duesenberry’s relative income hypothesis in Ethiopia," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 24(2), pages 549-564, December.
    2. Hiroaki Hayakawa, 2020. "Consumer behavior in a monetary economy and smoothing of composite consumption," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(1), pages 89-122, March.
    3. Eleni Zafeiriou & Constantinos Katrakilidis & Chrysanthi Pegiou, 2019. "Consumer Confidence on Heating Oil Prices: An Empirical Study of their Relationship for European Union in a Nonlinear Framework," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 63-90.
    4. Tahir Mukhtar & Aliya H. Khan, 2011. "The Current Account Dynamics in Pakistan: An Intertemporal Optimisation Perspective," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 401-421.
    5. Miguel Ángel Mendoza González, 2020. "Sensibilidad y asimetrías ante choques de ingreso en el consumo privado de México, 1995-2017. (Sensitivity and asymmetries of income shocks in Mexico's private consumption, 1995-2017)," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 21-58, May.
    6. Hiroaki Hayakawa, 2019. "Time Preferences, Intertemporal Optimization, and the Permanent Income-Life Cycle Hypothesis," Growth, Asian Online Journal Publishing Group, vol. 6(1), pages 1-11.
    7. Tahir Mukhtar & Aliya H. Khan, 2016. "The Current Account Deficit Sustainability: An Empirical Investigation for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(4), pages 397-419.
    8. repec:fgv:epgrbe:v:67:n:2:a:4 is not listed on IDEAS
    9. David Mautin Oke & Koye Gerry Bokana, 2017. "Understanding the Theory of Consumption in the Context of a Developing Economy," Journal of Economics and Behavioral Studies, AMH International, vol. 9(5), pages 219-229.
    10. KARGI, Bilal, 2014. "Türkiye Ekonomisinde Sürekli Gelir Hipotezine İlişkin Kanıtlar: Zaman Serileri Analizi (2004-2012) [Evidence for Turkey's Economy Permanent Income Hypothesis: Time Series Analysis (2004-2012)]," MPRA Paper 55696, University Library of Munich, Germany.
    11. Yoshito Funashima, 2024. "How does economic policy uncertainty respond to permanent and transitory shocks?," Bulletin of Economic Research, Wiley Blackwell, vol. 76(1), pages 267-282, January.
    12. Gomes, Fábio Augusto Reis, 2013. "Gasto do governo e consumo privado: Substitutos ou complementares?," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 67(2), June.
    13. Ebadi Esmaeil & Are Wasiu, 2023. "Reinvestigating the U.S. Consumption Function: A Nonlinear Autoregressive Distributed Lags Approach," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 17(1), pages 1-22, January.
    14. Till Treeck, 2014. "Did Inequality Cause The U.S. Financial Crisis?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 421-448, July.
    15. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    16. Jemey, Nursyuhada binti & Kasim, Nor Hasniah binti, 2023. "The Impact of Covid-19 on Consumption Patterns Among Malaysian Youths," MPRA Paper 118841, University Library of Munich, Germany, revised 26 Sep 2023.
    17. Lars Lochstoer & Harjoat S. Bhamra, 2009. "Return Predictability and Labor Market Frictions in a Real Business Cycle Model," 2009 Meeting Papers 1257, Society for Economic Dynamics.
    18. Alessandro Federici & Pierluigi Montalbano, 2012. "Macroeconomic volatility, consumption behaviour and welfare: A cross-country analysis," Working Paper Series 3612, Department of Economics, University of Sussex Business School.
    19. Evren Ceritoglu, 2017. "The effect of house price changes on cohort consumption in Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 17(3), pages 1-99–110.
    20. Luis A. Gil-Alana & Antonio Moreno & Seonghoon Cho, 2012. "The Deaton paradox in a long memory context with structural breaks," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3309-3322, September.
    21. Tyler Atkinson & David Luttrell & Harvey Rosenblum, 2013. "How bad was it? The costs and consequences of the 2007–09 financial crisis," Staff Papers, Federal Reserve Bank of Dallas, issue Jul.

    More about this item

    Keywords

    Consumption; Permanent Income Hypothesis; Cagan’s Adaptive Expectation Model; MPC.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D0 - Microeconomics - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D6 - Microeconomics - - Welfare Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:65787. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.