Regional Consumption Inequalities in Pakistan under Relative Income Hypothesis

Abstract

In this paper panel analysis is being carried on original Relative Income Hypothesis (RIH) and its other modifications over the time span of 1998 to 2015. To furnish reliable and appropriate estimation, Households Integrated Economic Surveys (HIES) based consumption and income variables have been gone through various stages of data filtering. The findings of Feasible Generalized Least Squares (FGLS) significantly validate the relevance of three types of ratchet effects (income, consumption and habit) in provinces. Average Propensity to Consume is highest for Baluchi’s households followed respectively by Pashtuns, Punjabi, and Sindhi. The selection of constant slop model implies that province-wise there is no difference in magnitudes of ratchet effect obtained from various versions of RIH. All provinces make adjustments in long run to their consumption in response to income fluctuations. Estimated marginal consumption propensities are according to economic theory that shows smooth consumption path in short run as well in the long run. Polices should be formulated to switch consumer mind set from consumption oriented to saving oriented with the help of appropriate tool of fiscal and monetary policies.