China’s Consumption Function: An Empirical Test of Absolute and Permanent Income Hypothesis

Abstract

The study investigated the empirical rationale of Absolute and Permanent Income Hypothesis (AIH) & (PIH) for China by applying the yearly data from 1970-2016. The outcomes of the research study dismissed the validity of PIH, at the same time it reinforced the soundness of AIH in the country. The aftereffects of CMMl demonstrate that any change that occurs in expected income significantly affects the innovation in real private consumption. Moreover, the share of forward-looking households is genuinely lower than backward-looking households. Under the CMM the estimated value of (1- λ) for China is 0.25, which implies that by and large 25 percent of the households set their consumption base on permanent income, albeit the rest of the families take their consumption preferences are subject to current income, notwithstanding the outcomes of the study bring up a solid dismissal of PIH for China.