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

Abstract

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.