Estimation of Consumption Functions Using Savings Motive Hypothesis (SMH)
Estimation of Consumption Functions Using Savings Motive Hypothesis (SMH)
In this paper a new consumption function is derived based on savings motive hypothesis (SMH). The major theory behind the SMH is that households save part of their income in period 1 and transfer it to period 2. Implying that consumption in period 1 is the addition of autonomous consumption and variable consumption in period 2. The validity of the SMH is tested by using data from India, Kenya, South Africa, Saudi Arabia, UK and USA for the period 1970 to 2018. The data analyses are performed by using World Bank Data and generalized least squares (GLS) method. The paper demonstrates that estimation of the consumption function could be done more accurately by using SMH of the consumption function. The MSH is based on the psychological savings motive theory. Some results in the paper can be used in making both household and national welfare decisions e.g. making use of the short run global marginal propensity to consume that is found to be 0.43.
___
- Ahmed, M., Baloch, A., Khan, K., Memon, M.H. (2015). The Estimation of Aggregate
Consumption Function for High Income Countries. International Journal of Engineering Technology Sciences, 5 (2), 85–100.
- Ando, A., Modigliani, F. (1963). The Life Cycle Hypothesis of Saving: Aggregate
Implication and Tests. American Economic Review, 53 (1), 55–84.
- Bilgili, F., Baglitas, H.H. (2015). Testing Permanent Income and Random Walk Hypothesis
for Turkey for the Period 1998:1–2012:1. The Second International Conference in Economics (EconWorld2-15), Torino, Italy, 18–20 August 2015.
- Coskum, Y., Atasoy, B.S., Morri, G., Alp, E. (2018). Wealth Effects on Household Final,
Stock and Housing Market Channels. International Journal for Financial Studies, 6(57), 1–32.
- Devarney, S.A., Anong, S.T., Whirl, S.E. (2007). Household Savings Motives. The Journal
of Consumer Affairs, 41(1), 174.
- Drakopoulos, S.A. (2021). Theories of Consumption. Munich Personal RePEc Archive
(MPRA) Paper No. 1082015.
- Duesenberry, J.S. (1948). Income Consumption Relations and Their Implications. In Income,
Employment and Public Policy: Essays in Honor of A.H. Hansen, ed. Lloyd A. Metzler. New York: W.W. Norton and Company, 54–81.
- Duesenberry, J.S. (1949). Income, Saving and Theory of Consumption Behavior. Cambridge,
Massachusetts: Harvard University Press.
- Fernandez–Corugedo, E. (2004). Consumption Theory. London: Central Bank of England.
- Fisher, I. (1930). The Theory of Interest. New York: Macmillan.
- Foster, J. (2018), The Consumption Function: A New Perspective. Munich Personal RePEc
Archive (MPRA), Paper No.84383.
- Foster, J. (2019), “The US Consumption Function: A New Perspective,” Paper Submitted to
the School of Economics, The University of Queensland, Brisbane in August 2029.
- Friedman, M. (1957). A Theory of Consumption Function. Princeton: Princeton University
Press.
- Friedman, M. (1959). A Theory of the Consumption Function. Princeton: Princeton: Princeton
University Press.
- Hadden, J.J. (1965), A Study of the Consumption Function in Canada. Electronic Thesis
Dissertation 6384.
- Hall, R.E. (1978). Stochastic Implications for of the Life Cycle–Permanent Income
Hypothesis: Theory and Evidence. Journal of Political Economy, 86, 971–987.
- Hynes, A.H. (1998). The Emergence of the Neoclassical Consumption Function: the
Formative Years, 1940–1952. Journal of the History of Economic Thought, 20 (1), 25–49.
- Jouini, J. Ismail, M. (2020). Growth – Savings Nexus in the Arab Region: Empirical Evidence
from Panel Data. Arab Monetary Fund (2020), 1–37.
- Keho, Y. (2019). Modeling the Response of Private Consumption to Income: Evidence from
ECOWAS Countries. Journal of Advances in Economics and Finance, 4(3), 109–116.
- Klein, L.R. Goldberger, A.S. (1955). An Econometric Model of the United States, 1929–1952.
North Holland
Kyrk, H.A. (1923). Theory of Consumption. Boston: Houghton Mifflin Company.
- Khan, K., Anwar, S., Ahmed, M., Kamal, M.A. (2015). Estimation of Consumption Function:
The Case of Bangladesh, India, Nepal, Pakistan and Sri Lanka. Pakistan Business Review, April 2015, pp.113–124.
- Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London:
Macmillan.
- Keynes, J.M. (1961). The General Theory of Employment, Interest and Money. London: Macmillan.
- Keynes, J.M. (1964). The General Theory of Employment, Interest and Money. New York:
Harcourt Brace Jovanovich.
- Kuznets, S. (1946). National Product Since 1869. New York: National Bureau of Economic
Research.
- Landsen, J. (2016). An Investigation of the Norwegian Consumption Function: Income
Distribution and Wealth Effects. Oslo, Norway: Statistics Norway.
- Liu, Y. (2012). A Critique of the Neoclassical and A Revision of the Keynesian Theories of
Employment. Electronic Theses and Dissertations, 373.
- Lungfang, D. Khan, K., Khan, I., Khan, N.H. (2018). Testing the Empirical Validity of
Permanent Income Hypothesis and Absolute Income Hypothesis for China. The Empirical Economics, 17(4), 453–460.
- Matlanyane, R.A. (2005). A Macroeconometric Model for the Economy of Lesotho: Policy
Analysis and Implications. PhD Thesis, University of Pretoria, South Africa.
- Modigliani, F. (1949). Fluctuations in the Savings Ratio: A Problem in Economic
Forecasting. In Studies in Income and Wealth, ed. Conference on Research in Income and Wealth, National Bureau of Economic Research (NBER), 11, 371–443.
- Modigliani, F., Brumberg, R.H. (1954), Utility Analysis and the Consumption Function: An
Interpretation of the Cross Section Data. In Post Keynesian Economics, ed. Kenneth K. Kurihara. New Brunswick, New Jersey: Rutgers University Press, pp.338–436.
- Muellbauer, J.N., Lattimore (1994). The Assessment: Consumer Expenditure. Oxford
Review of Economic Policy, 10, 1–41.
- Mukherjee, S., Bhattacharye, D. (2018). Estimation of MPC in India. International Journal
of Business and Applied Quantitative Management Research, 5(5), 65–76.
- Sekantsi, L.P. (2016). Determinants of Private Consumption Expenditure in Lesotho. Journal
of Corporate Governance. Insurance and Risk Management (JCGIRM), 3(2), 58–75.
- Singh, B. (2004). Modelling Real Private Consumption Expenditure: An Empirical Study of
Fiji. Reserve Bank of Fiji Working Paper 2004/05.
- Smart, W. (1916). Second Thought of an Economist. New York: Macmillan.
- Yao, R., Wang, F., Weagly, R.O., Liao, L. (2011). Household Saving Motives: Comparing
American and Chinese Family Consumers. Family and Consumer Science Research Journal, 40 (1), 28–44.