Abstract
The study empirically analyzes private consumption in Lesotho over the period 1982-2015 by employing an Autoregressive Distributed Lag bound test approach to cointegration. The results show that private consumption is positively influenced by the level of national disposable income in the short run and long run. The Marginal Propensity to Consume is highly significant and is less than 1. This proves the Keynesian consumption theory in Lesotho. The research findings reveal that increased government expenditure crowds out private consumption in the short run and long run. A growth in the level of inflation has no effect on private consumption. An expansion in the rate on deposits positively affects private consumption in the short run. The policy recommendation given the results of the study is that the government of Lesotho should implement initiatives aimed at increasing employment as well as private sector development as espoused in the country’s National Strategic Development Plan.
Highlights
Investigation into the concept of consumption can be traced as far back as 1936 to Keynes’ General Theory of Employment, Interest and Money which is widely regarded as the bedrock of macroeconomics
The results show that private consumption is positively influenced by the level of national disposable income in the short run and long run
National disposable income and government expenditure are stationary at first difference at the 1 per cent significance level under both the ADF and PP tests
Summary
Investigation into the concept of consumption can be traced as far back as 1936 to Keynes’ General Theory of Employment, Interest and Money which is widely regarded as the bedrock of macroeconomics. It is in light of this that [1] and [2] highlighted that the theory of consumption was at the heart of Keynes’ General Theory model. Relative to any other speciality fields in macroeconomics, the theory of consumption is the most influenced by the rational expectations revolution. Reference [4] coupled with [5], defined consumption as goods and services purchased by households. Reference [6] concurred, and noted that for a given level of income, consumption determines savings and investment. Variations in consumption could be sources of economic shocks and taking a closer look at consumption is important in order to understand, inter alia, the effects of government policies on investment and economic growth
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