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Estimating Consumption Function under Permanent Income Hypothesis: A Comparison between Nigeria and South Africa

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  • R. Santos Alimi

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.Classification-JEL:

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  • R. Santos Alimi, 2015. "Estimating Consumption Function under Permanent Income Hypothesis: A Comparison between Nigeria and South Africa," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(11), pages 285-298, November.
    • Handle: RePEc:hur:ijarbs:v:5:y:2015:i:11:p:285-298
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    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.
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    Cited by:

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    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.
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    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

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