AGGREGATE CONSUMPTION IN PAKISTAN: Revisiting the Permanent-Income Hypothesis under Adaptive Expectation Model

Abstract

This study is an empirical investigation of aggregate consumption function under the permanent income hypothesis for Pakistan based on Cagan (1956) and Gujarati and Porter (2009) methodologies. The study employs the annual time series data of real per-capita aggregate consumption and real per-capita income during 1973 to 2015. Results of the study reveal that in short-run a unit increase in per-capita income will increase the per-capita consumption by Rs.0.74 which is the short-run MPC, while the long-run MPC out of income is 0.78. The coefficient of adaptive expectation term is positive, but insignificant; indicating that previous consumption has no significant impact on current consumption or there is no significant role of past consumption on the present consumption decisions. The insignificance of adaptive-expectation term rejects the existence of permanent-income hypothesis under adaptive expectation. Contrary to this, the significant positive effect of per-capita income supports the absolute-income hypothesis in Pakistan.

Keywords

• Aggregate Consumption
• Permanent-Income Hypothesis
• Adaptive-expectation
• Pakistan