Consumption Hypotheses

This research paper contains an empirical study of the Absolute, Relative, and Permanent Income Hypotheses of consumption. Consumption functions related to these hypotheses have been estimated and values of MPC—both the short and the long run—are obtained. For the absolute and the relative income models, this was done for the whole period under study (1974-2000) and for the first half (1974-87) and the second half (1988-2000) separately. For the Permanent Income Hypothesis, estimates were obtained and reported for the period of 1986-2000 only since estimates for longer periods generated inadmissible values of MPC. An interesting observation is that the values of MPC were higher in the first half than in the second half. This implies that aggregate consumption changed less in response to income changes in the second period. This could also mean that the marginal propensity to save became higher in the second period. Since aggregate consumption is the largest part of macroeconomic aggregate demand, the values of MPC which have been obtained and differences seen for the two periods and between the functions may be found useful to the researchers and the policy makers.