The Impact of Covid-19 on The Effect Multiplier on The Household Consumption Function in Jakarta

The purpose of this study is to examine the effect of a decrease in aggregate income, due to activity restrictions during the Covid-19 pandemic, on household consumption expenditure in Jakarta. The research model is based on the Absolute and Permanent income hypothesis, to see the long-term and short-term effects of changes in income on consumption expenditure. The research method is quantitative by using annual data on consumption expenditure and income at current prices for the period 2003 to 2020. The analysis model uses OLS and ECM regression. The results showed that income has a significant effect on the equation of the short-run and long-run consumption function. The short-term income crisis has an impact on the increase in the multiplier coefficient. In the short term there will also be an adjustment in consumption expenditures, according to what is postulated in the permanent income hypothesis. This indicates that in the short term expansionary fiscal policy is effective in increasing aggregate household consumption expenditure. Further research suggests adding the inflation variable as a proxy for economic conditions. Keywords: Absolute Income Hypothesis, Permanent Income Hypothesis, Household Consumption Expenditures, National Income, Multiplier.

The Permanent Income Hypothesis: Evidence from Ghana

This study aims to test the validity of the PIH for Ghana using aggregate annual data of GDP per capita and household consumption expenditure per capita from 1971 to 2017. The data used were taken from UN statistics. The PIH holds that the income a consumer expects to persist throughout his or her life is what determines their consumption. Earlier studies have shown that the PIH implies the magnitude of the revision in permanent income arising from innovation in the income process is proportional to the magnitude of the revision in consumption arising from the same innovation. This study tests this implication. Innovation in the income process here is the part of the income process that could not be forecasted. The study generates the innovation in the income process by estimating an ARMA model for income and then estimates a consumption equation by OLS using the consumption variable and the generated innovation in income variable.The study finds that the magnitude of the revision in permanent income arising from the innovation in income is larger than the magnitude of the revision in consumption resulting from the same innovation. This implies consumption response to changes in income is smaller than what the PIH predicts. This result is taken as evidence that the PIH does not hold for Ghana.

The Excess Smoothness and Sensitivity of Consumption in the V4 Countries

This paper contributes to the debate on the Permanent Income Hypothesis (PIH) and excess consumption smoothness and sensitivity in the context of conditions in the V4 countries. This paper also shows results contrary to the belief of the Permanent Income Hypothesis/Random Walk Hypothesis that the change in consumption is an innovation which is not predictable by lagged saving or lagged income change. The paper tests the implication of the Permanent Income Hypothesis/Random Walk Hypothesis, using quarterly aggregate data for 1995–2017 in the V4 countries. A vector autoregression for saving and changes in disposable income is used to generate a forecast of declines in disposable income. As a result, when income changes abruptly, the resulting change in consumption is much smoother and conversely, when changes in income are anticipated, consumption responds sensitively. The aggregate consumption is both excessively smooth relative to the new information causing consumers’ revision of previous expectations about current and future income, and excessively sensitive to lagged income growth.

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).