Real Private Consumption Research Articles

The Extent, Excessiveness and Sustainability of Afghanistan’s Current Account

This article empirically investigates the extent, excessiveness and sustainability of Afghanistan’s current account (CA) deficits using quarterly data from 2004-Q2 to 2019-Q4. The framework of this article is the intertemporal approach to the CA using the present value model. First, a descriptive analysis of Afghanistan’s CA is conducted. Next, a bivariate vector auto-regressive (VAR) model is applied to estimate the optimal CA of the economy, which can be compared to the actual one to determine how excessiveness the actual CA is relative to the optimal one. The Augmented Dickey-Fuller and Johnson co-integration tests are applied to examine the necessary and sufficient conditions for the sustainability of the CA. Findings indicate that Afghanistan’s actual CA deficits are excessive and too variant relative to the optimal one; therefore, the deficit is considered problematic. The empirical results further disclose that Afghanistan’s CA is unsustainable. The lack of co-integration between real net output and real private consumption and between exports and imports suggests that the unsustainability is mainly due to the weakness of domestic production in satisfying internal demand and the failure of real export volume to equilibrate the trade balance. Hence, this study recommends increasing the level of domestic output, and reduction in imports supported by improvements in saving rate, infrastructure and export to improve the CA. JEL Codes: F14, F32, F39, C22

Accelerating inflation expectations of households in the euro area: sources and macroeconomic spending consequences

ABSTRACT In 2021 and 2022, inflation expectations of households in the euro area rose dramatically. Based on a time-series investigation from 1995 to 2022, I find that inflation expectations are driven by current price developments of three consumption product categories and house prices (which are not included in the consumer price index). About half of the recent rise was fuelled by energy prices, 20% by food prices, over 10% by transportation costs and almost 20% by house prices. On a macro-level, controlling for a standard set of spending determinants, a regression analysis suggests that accelerating inflation expectations in general will slow down growth of area wide real private consumption, but under circumstances of low nominal interest rates helped to cushion the negative shock of the covid pandemic and the energy crisis.

Exploring the Empirical Linkages between Economic Growth and Private Consumption: Contextual Evidence from Pakistan

The sustainable development of a country is assumed to be a healthy sign for domestic consumers as well as producers. As private consumption is a vital component of real gross domestic product (GDP) and it can influence economic growth. This study explored a dynamic relationship between economic growth represented by real GDP and real private consumption expenditure (PCE). Stationarity of private consumption expenditure and GDP in first differences led to cointegration analysis between these time series data. Cointegration test indicated the existence of co-integrating relationship between these two variables. Vector error correction model (VECM) was employed to test the possibility of long-run adjustment towards equilibrium as well as nature of short-run dynamics. Granger causality test shows plausible role of short run consumption dynamics significantly improve predictive power of the model for real GDP growth.

أثر سياسة التقشف التوسعي على الناتج المحلي الإجمالي: حالة مصر Impact of expansionary austerity policy on GDP: Egypt

تهدف الدراسة إلي اختبار فرضية التقشف التوسعي في الاقتصاد المصري، أي قياس أثر سياسات التقشف المالي في الاقتصاد المصري علي النمو الاقتصاد المصري، ولاختبار مدي صحة تلک الفرضية تم تقدير معادلة النمو الاقتصادي في الاقتصاد المصري، تم استخدام بيانات سنوية عن الفترة (1980-2017)، وتم الاعتماد علي نموذج المعادلة الواحدة من خلال استخدام معادلة انحدار متعدد للنمو الاقتصادي، وکانت محددات النمو الاقتصادي التي تم استخدمها کمتغيرات مفسرة مستقلة للنموذج هي: الإنفاق الاستهلاکي الخاص، والإنفاق الاستثماري الخاص، والإنفاق الحکومي بشقيه الاستهلاکي والاستثماري، وصافي التعامل مع العالم الخارجي، والضرائب، وقد تم اختبار جذر الوحدة لمعرفة مدي استقرار السلاسل الزمنية باستخدام اختبار فيلب بيرون، واتضح من نتائج اختبار فيليب بيرون أن جميع السلاسل الزمنية لکل من الناتج المحلي الإجمالي الحقيقي، والإنفاق الاستهلاکي الخاص الحقيقي، والإنفاق الاستثماري الخاص الحقيقي، والإنفاق الحکومي الحقيقي بشقيه الإستثماري والخاص وصافي التعامل مع العالم الخارجي وقوة العمل، مستقرة عند أخذ الفروق الأولى لها سواء بإفتراض وجود مقطع أو وجود مقطع واتجاه عام، عند مستوي معنوية1%. کما توصلت نتائج الدراسة الي عدم فاعلية التقشف المالي التوسعي في تحفيز الناتج المحلي الإجمالي الحقيقي في الاقتصاد المصري، وقد يرجع هذا لأن الإنفاق الحکومي في الإقتصاد المصري يرکز علي البنية التحتية، الأمر الذي يقلل من أثر مزاحمة القطاع الحکومي للقطاع الخاص، بالإضافة إلي وجود موارد معطلة في الاقتصاد المصري، الأمر الذي يعني أن ارتفاع الإنفاق الحکومي محفز للنمو الاقتصادي في الاقتصاد المصري ومن ثم عدم فاعلية سياسات التقشف التوسعي في الاقتصاد المصري. The study aims to test the hypothesis of expansionary austerity in the Egyptian economy, ie to measure the impact of fiscal austerity policies in the Egyptian economy on the growth of the Egyptian economy. To test the validity of this hypothesis, the economic growth equation in the Egyptian economy was estimated. Annual data were used for the period (1980-2017),The single equation model was relied on by using a multiple regression equation for economic growth. The determinants of economic growth that have been used as independent explanatory variables for the model are: private consumption expenditure, private investment spending, government spending in both consumption and consumption, net dealing with the outside world, taxes, The root of the unit was tested to determine the stability of the time series using the Philip Peron test. The results of the Philip Peron test showed that all the time series of real GDP, real private consumption expenditure, real private investment spending, real government spending in both investment and private sectors and net dealing with the outside world and the labour force stable When taking the first differences, either assuming intercept or intercept and trend, at the level of significance of 1%. The study also concluded that expansionary fiscal austerity is not effective in stimulating real GDP in the Egyptian economy. This may be due to the fact that government spending in the Egyptian economy focuses on infrastructure, which reduces the impact of crowding out the government sector to the private sector, in addition to the existence of idle resources. In the Egyptian economy, this means that high government spending is a catalyst for economic growth in the Egyptian economy and hence the ineffectiveness of expansionary policies in the Egyptian economy.

Covid-19 and monetary–fiscal policy interactions in Canada

We investigate fiscal–monetary policy interactions in Canada over a period that includes the global financial and Covid-19 crises. We relax the assumption that policy regimes are fixed, and estimate interest rate rules for monetary policy and tax rules for fiscal policy that switch stochastically between two regimes. We also use of a structural vector autoregressive (VAR) model to analyze the effects of fiscal policies, similar to the ones undertaken by the Canadian government (and other governments around the world) during the coronavirus pandemic. We find that fiscal policy has been more active than monetary policy and that deficit spending helps to boost economic activity in the short-run. However, the positive effects on real GDP and real private consumption die out with the end of the fiscal stimulus. Long-term interest rates rise, investment falls, and inflation rises, creating problems for an inflation targeting central bank.

AN ESSAY ON CONSUMPTION HYPOTHESES: EVIDENCE FROM PAKISTAN

In this study, the ARDL method is used to assess short-term and longterm relationships between private consumption, labor income, interest rate, wealth, and unemployment rate. The real private consumption model for Pakistan has been estimated by applying yearly data from 1990 to 2016. According to long-term estimates, income and wealth determine the actual national consumption. Nevertheless, the short run national private consumption is determined by current incomes, wealth, real interest rates, and the unemployment rate. Findings of this study reveal significant impact of all the observed determinants of consumption function i.e. real disposable income, wealth, real interest rate, and unemployment rate on aggregate consumption. Whereas it is noteworthy that the coefficient for wealth was minor but significant, depicting slight impact of wealth on consumption decision. These results support validity of AIH for Pakistan.

Estimation of Consumption Function for Developing Economies: China, Turkey, Vietnam and Bangladesh

This study analyses the determinants of consumption function for four countries: China and Turkey as Upper Middle-Income Economies (UMIE); Bangladesh and Vietnam as Lower Middle-Income Economies (LMIE). It used a model based on the ARDL technique to analyze the time series data for the period of 1985- 2018. The results reveal that wealth and labor income have a similar impact on consumption in UMIE and LMIE since they affect significantly and positively aggregate consumption. Unemployment and real interest rates have an analogous result for UMIE while assorted results LMIE. The real interest rate harms RPAC as evidence of income effect. However, the short-term wealth and real GDP positively affect real RPAC whereas the unemployment rate and real interest rate negatively affect aggregate real private consumption of the selected economies.

Monetary policy and transaction costs: Empirical analysis of consumption function for the United States of America (1988–2014)

Abstract In macroeconomic theory, different approaches discuss the ability of monetary policy to affect real variables in the long run. This research proposes the empirical application of a theoretical model that includes nominal rigidities arising from transaction costs and real rigidities arising from the firms’ competition structure. Thus, based on data from the US economy we propose to test the theoretical results combining the existence of shocks arising from both real factors and factors affecting the money market, establishing tests for shocks of supply and aggregate demand. The concern is to investigate if the economic policy is capable of affecting the long run (average) values of the real private consumption. Time series analysis methodology of Structural Vector Autoregressive (SVAR) models was used to test long run relationship for US economy. The ability to establish the long run relationships between these aggregates with some degree of confidence, allow simulating shocks by impulse response functions and variance decomposition. The theoretical results of the model indicate that productivity, transaction costs (number of transactions with credit/debit cards) and currency money tend to positively influence consumption, whereas delinquency have a negative effect on consumption. We tested two empirical specifications and both confirmed the theoretical results for the US economy and, therefore, the research can help policymakers to measure the long run consequences of their decisions, that is, the results converge on the non-neutrality of money in the long run in the US economy.

Thick modelling income and wealth effects: a forecast application to euro area private consumption

This study develops a thick modelling tool for real private consumption, with a conditional forecasting application to the euro area. Several equations from thousands of error correction models, always including labour income, non-labour income, financial wealth and non-financial wealth as determinants, are selected from predetermined in-sample and out-of-sample criteria. Our thick model estimates show that income effects differ between labour and non-labour income and that their (relative) importance varies over time. This implies that labour and non-labour income should both be on the radar of policy makers and modellers.

SHORT AND LONG-RUN CORRECTED MARGINAL PROPENSITY TO CONSUME. POLISH ECONOMY IN THE PERIOD 1995–2018

In the introductory part of the article – referring to Keynes’ theory – basic macroeconomic relations between global consumption and gross domestic product are discussed and defined. Next, an analysis of statistical information on private consumption expenditure of households (C) and global consumption expenditure of the society (CO) against the background of gross domestic product (GDP) in Poland in 1995–2018 was carried out. The analysisof empirical material carried out allowed formulating preliminary assumptions regarding the analyzed macro-dependencies.In the main theoretical part of the article – referring, inter alia, to the conclusions from the empirical part of the analysis – the research hypothesis was formulated, according to which: the relationship between real consumption (C or CO) and gross domestic product (GDP) is linear, inertial and subject to a correction mechanism. To verify the hypothesis, an autoregressive model of global consumption was formulated, which was subject to the errorcorrection mechanism (ECM). Based on the analytical form of the considered model, the following measures were defined:— short-run, immediate uncorrected marginal propensity to consume (SrMPCim),— short-run corrected marginal propensity to consume (SrMPCcrd),— long-run corrected marginal propensity to consume (LrMPCcrd).In addition, a switch trend function was defined that was assigned to the dynamic error correction model (ECM) under consideration.In the empirical part of the article, two versions of the considered autoregressive consumption model with a correction mechanism were considered. In the first version of the model, real private consumption of households (C) was dependent on domestic product (GDP).On the other hand, the second version makes the total consumption of the society (CO) dependent on the domestic product (GDP). Both versions of the model were estimated, verified and interpreted.The analysis of the estimated versions of the model confirmed the theoretical research hypothesis according to which real consumption:— is linearly dependent on the gross domestic product,— is inertial,— it is corrected in time.

Macroeconomic effects of fiscal policy in Pakistan: a disaggregate analysis

ABSTRACTThis study analyzes the macroeconomic effects of fiscal policy on macroeconomic variables in Pakistan. The study utilizes VAR framework and uses quarterly data of Pakistan from 1976Q1 to 2017Q4. The results showed that after an increase in government expenditures, private consumption and prices take three quarters to increase, while private investment follows the declining trend. Private consumption and interest rate are negatively related with taxes, while private investment and prices are positively related with taxes. Real GDP, private consumption and interest rate respond positively with an increase in developmental expenditure, public consumption and public investment. Private investment is negatively related with development expenditure, public consumption and public investment. An increase in direct tax as well as indirect tax leads to an increase in real GDP, private investment and interest rate, while private consumption takes three to five quarters to responds. Private investment and prices are positively related with non-tax revenue, while real GDP, private consumption and interest rate are negatively related. These results support the Keynesian view that government expenditure and taxes are useful tools to stimulate the economic activity, while crowding-out hypothesis holds in Pakistan as well. An active and efficient role of government is required for macroeconomic stability.

Disaggregate Income and Wealth Effects in the Largest Euro Area Countries

This study extends a thick modelling tool for aggregated euro area real private consumption of de Bondt et al. (2019) to the four largest euro area countries. The suite of error correction models performs well in and out of sample. The ranges and averages of estimated elasticities are, however, sensitive to the exact model specification. We also show that decomposing disposable income into labour, property and transfer income is essential for understanding and forecasting consumption. Finally, substantial crosscountry heterogeneity in marginal propensities to consume out of income and wealth components calls for caution when interpreting aggregate euro area developments. JEL Classification: C53, D12, E21, E27

Modelling Real Private Consumption Expenditure in South Africa to Test the Absolute Income Hypothesis

This paper explores, the hotly debated topic among economists and policymakers, whether fiscal and monetary policies impact on households by examining the relevance of the absolute income hypothesis in explaining private consumption expenditure and its relationship with household disposable income in South Africa. Worldwide, private consumption expenditure remains a big puzzle for leading consumption function theories. Friedman’s permanent income hypothesis posits that private consumption expenditure is not affected by how much consumers earn on a daily basis, but by what they expect to earn during their lifetime. Friedman’s permanent income hypothesis is at odds with Keynes’s absolute income hypothesis, that private consumption expenditure is affected by fiscal stimulus policies, which are effective for increasing economic activity and employment. Subscribing to the former underrates the potential power of fiscal stimulus policies and other monetary or trade policies that boost short-term income. The overarching objective of this paper is to ascertain whether patterns of private consumption expenditure in South Africa are determined by Friedman or Keynes’s theory. The paper specified econometric equations with quarterly seasonally adjusted data from the South African Reserve Bank for the sample period 1984 to 2015 and estimated them with cointegration techniques consisting of the Engle-Granger two-step approach. The importance of the paper and its scientific novelty are that it is more realistic since it specified models that take into account the reaction time of the dependent variable when the independent variable changes by imposing lags on the variables. The empirical results indicate that in South Africa, when household disposable income changes over time, private consumption expenditure depends more on a household’s previous disposable income than its current disposable income. The main empirical finding is that the absolute income hypothesis is not appropriate in explaining private consumption expenditure in this country. Even when the interest rate was included in a modified absolute income hypothesis, the overall estimates were not robust. Hence, estimates of the short- and long-run regression models were not consistent with the absolute income hypothesis. This is in line with arguments put forward in some extant studies using this model, that the fiscal stimulus policies might not generate the desired increased economic activity and employment. If households use money from the fiscal stimulus policies to bail themselves out of existing debts rather than consume additional goods and services which, would be the catalyzer to increase Gross Domestic Product (GDP).

An Analysis of Consumption Function: A Case Study of Upper Middle Income Economies

This paper draws on evidence of consumption function from four-country group case-studies of upper middle-income economies (together termed as developing economies). The ARDL model is applied to the time series data from 1985 to 2017 to understand the major components of the aggregate consumption function. The result reveals that labor income and wealth impact in all economies are similar and have a significant positive impact on real private aggregate consumption. Similarly, the real interest rate and unemployment have an analogous effect on real private aggregate consumption. The real interest rate has a negative effect on aggregate real private consumption supporting income effect. In the short run real GDP and wealth have a positive impact on aggregate real private consumption while real interest rate and unemployment rate have a negative effect on aggregate real private consumption for selected economies. Moreover, overall PIH is valid for long-run, while AIH is valid for short-run in the selected countries.

Effects on the U.S. economy of its proposed withdrawal from the Paris Agreement: A quantitative assessment

This paper assesses the potential effects on the U.S. economy if the U.S. retreats from its pledge to reduce greenhouse gas emissions agreed under the Paris Agreement. We assume prior to withdrawal that the U.S. and other nations or regions would introduce climate change policies, such as emissions trading schemes, to meet their emission targets which were agreed in Paris. When the U.S. withdraws from the Paris Agreement, it will not adopt such a policy. We use a modified version of the GTAP-E model to examine the effects on the U.S. economy of its anti-mitigation action in a counterfactual framework. The findings suggest that a retreat from the Paris Agreement would increase the real GDP and real private consumption by 1.13% and 0.78%, respectively, in the U.S. Given such improvements at the macro level, the effects on the U.S. energy sectors from the withdrawal are substantial. Prices of energy would reduce considerably, particularly for coal, natural gas, and consequently the price of electricity (−17.8%). These three energy sectors would also experience considerable expansions when the U.S. withdraws from the Paris Agreement compared to its position if it honored its previously pledged committed targets.

Assessing the effects of housing market shocks on output: the case of South Africa

PurposeThis paper aims to assess the effects of housing market shocks on real output in South Africa, by focusing on the real private consumption channel.Design/methodology/approachIt measures housing market shocks as non-monetary housing shocks, uses a data set covering the period 1969Q4-2014Q4 and uses the agnostic identification procedure.FindingsThe paper finds that 20 per cent of the variation in house prices is explained by these shocks. The paper also finds that the effects of housing demand shocks on real private consumption are short-lived and generate a transitory real output response. Overall, housing demand shocks have managed to explain nearly 13 per cent and 14 per cent of the variation in real private consumption and real output respectively, over 20-quarters ahead forecast revision.Research limitations/implicationsThis finding suggests that shocks emanating from the housing market in the country are essential and should be considered when making macroeconomic policy decisions.Originality/valueNone of the existing studies, to our knowledge, have empirically assessed the effects of housing market shocks on real output directly. This paper attempts to contribute to the literature by assessing the direct impact of housing market shocks on the real output, using South Africa as a case study.

ESTIMATION OF AGGREGATE CONSUMPTION FUNCTION FOR HIGH INCOME COUNTRIES

Aggregate Real Private Consumption (ARPC) is one of the major components of the Gross Domestic Product (GDP) that contributes to specify any economy’s long term living standards. The contribution of ARPC stands on average around 55%. It is therefore important to understand the components of consumption, which is almost more than half of the aggregate economic expenditure. The study is an attempt to make a case for developing countries to bring policy level changes in order to determine the consumption pattern of developing countries’ GDP. Using an appropriate empirical model, the study investigates the validity of Permanent Income Hypothesis (PIH) and Absolute Income Hypothesis (AIH) on ARPC for selected developed economies. The results of the study reveal that the important determinants of ARPC in the long-run are real GDP and wealth, while in the short-run they are real interest rate and unemployment rate.

Stock market crashes shocks and real economy in Tunisia

Our paper analyses the effect of stock market crashes shocks on the real economy in Tunisia using the vector autoregressive (VAR) model. On the one hand, the impulse response analysis shows that the real investment growth rate negatively reacts to stock market crashes shocks. On the other hand, the variance decomposition results suggest that the stock market crashes shocks explain a larger proportion of the variability in real investment growth rate. In contrast, the real industrial production growth rate, the real GDP growth rate and the real private consumption growth rate are only a little sensitive to Tunisian stock market crashes shocks.

Empirical Assessment of the Eurozone Monetary Policy Transmission in Latvia

The purpose of the paper is to evaluate the international transmission effects of euro area monetary policy shocks on the main economic and financial variables in Latvia in period from 2000 to 2014. Empirical assessment is made using a standard structural vector autoregression (SVAR) model of the euro area, augmented by the Latvian variables of interest (real GDP per capita, annual inflation and money market interest rate, and consecutively by additional variables: real private consumption per capita, investments, exports and imports, various loan interest rates and real wages). The estimated SVAR model shows that a negative monetary policy shock in the euro area has a strong and persistent effect on Latvian economy via interest rate and foreign demand channels. The main results shown by impulse response functions suggest that the estimated reaction of Latvian variables is several times stronger than the reaction of euro area aggregates. Volatility of reactions can be explained by the small size and high openness level of Latvian economy.    Keywords: Monetary transmission; Euro area; Structural VARÂ

Empirical Assessment of the Eurozone Monetary Policy Transmission in Latvia

The purpose of the paper is to evaluate the international transmission effects of euro area monetary policy shocks on the main economic and financial variables in Latvia in period from 2000 to 2014. Empirical assessment is made using a standard structural vector autoregression (SVAR) model of the euro area, augmented by the Latvian variables of interest (real GDP per capita, annual inflation and money market interest rate, and consecutively by additional variables: real private consumption per capita, investments, exports and imports, various loan interest rates and real wages). The estimated SVAR model shows that a negative monetary policy shock in the euro area has a strong and persistent effect on Latvian economy via interest rate and foreign demand channels. The main results shown by impulse response functions suggest that the estimated reaction of Latvian variables is several times stronger than the reaction of euro area aggregates. Volatility of reactions can be explained by the small size and high openness level of Latvian economy. Keywords: Monetary transmission; Euro area; Structural VAR