Estimation of Consumption Functions Using Savings Motive Hypothesis (SMH)

Jimmy Alani*
Volume 14, Issue 1

The paper aims to provide more accurate and robust estimates of the marginal propensity to consume (MPC). The problem of the study is that some researchers find that MPC is more than 70%. In contrast, others find that MPC is between 50% and 70% in most economies. The paper’s hypothesis is that: MPC falls between 50% and 70% in most economies in the long–run. The paper’s consumption function is based on the savings motive hypothesis (SMH). This implies that consumption in period 1 is the addition of autonomous consumption and variable consumption in period 2. The SMH is tested using data from India, Kenya, South Africa, Saudi Arabia, the UK and USA between 1970 and 2018. The six countries are selected because they represent three levels of national development: low, middle and high income. Data analyses are performed using World Bank Data and the generalized least squares (GLS) method. Empirical evidence shows that estimation of the consumption function using SMH provides more accurate results. The SMH is based on the psychological savings motive theory. Test findings show that the short-run global MPC (0.43) could be used in making household and national welfare decisions.

Keywords: Household consumption function, Savings motive hypothesis, Psychological saving motive theory, Household disposable income, Marginal propensity to consume.
JEL Classifications: C23, E21, 055, E21, F41.
DOI #: 10.33818/ier.1023428