Investigating the Existence of Co-integration Relationship in the Consumption Function

Document Type : Original Article


Department of Economics,Faculty of Economics and Political Science, Shahid Beheshti University


Although more than 80 years are passed from the time that Keynes hypothesized that consumption is a function of disposable income, yet there is no consensus among economists on this issue. Some economists argue that consumption is a function of wealth. Recently, new macroeconomic theory, based on micro-foundations has revealed some facts that wealth is the main determinant of consumption in the long run. Those empirical studies that assumed consumption is only a function of disposable income, have failed to reach a co-integrated consumption relationship. The analysis based on newly developed theory of co-integration has revealed that consumption, income and wealth are all integrated of order one, so they can form a long run co-integrated relationship. Life Cycle hypothesis of Ando and Modigliani states that consumption of a person is related to his/her age. If this is true, ignoring the age structure of the population in the consumption function could lead to a non co-integrated relationship. This article, with the aim of finding a set of co-integrated variables for the consumption function, drives and estimates an aggregated consumption function. It is found that a co-integrated relationship could only exist if wealth and age-structure variables are included in a consumption function. Moreover, marginal propensity to consume out of disposable income is estimated to be 0.6 and 0.52 in the urban areas. These figures for the rural areas are estimated to be almost 0.7 . As far as the average propensity to consume (APC) is concerned, those who belong to the age group of 50-69 have the least APC. Results from estimating the Error Correction Models (ECM) show that the speed of adjustment towards equilibrium level of consumption is relatively low , since almost 34% of disequilibrium error is adjusted in each period. 


1- زراءنژاد، منصور (1386)، تخمین تابع مصرف کالاهای مصرفی برای دو گروه خانوارهای شهری و روستایی ایران در دوره 53-77، فصلنامه پژوهش­های اقتصادی ایران، شماره 16.
2- نوفرستی، محمد (1390)، ریشه واحد و همجمعی در اقتصادسنجی، چاپ چهارم، نشر رسا.
3- نوفرستی، محمد و سید صهیب مدنی تنکابنی (1385)، اثر تغییر ساختار سنی جمعیت بر هزینه‌های مصرفی بخش خصوصی، پیک نور (ویژه اقتصاد)، فصلنامه دانشگاه پیام نور، سال چهارم.
4- Ando A, Modigliani F (1963) The “Life cycle” hypothesis of saving: aggregate implications and tests. Am Econ Rev 53(1)
5- Attfield CLF, Cannon E (2003) The impact of age distribution variables on the long run consumption function. Discussion paper 03/546, University of Bristol
6- Bosworth B, Burtless G, Sabelhaus J (1991) The decline in saving: evidence from household survey. Brookings Pap Econ Act 1.
7- Demery D, Duck NW (2001) Savings age profiles in the UK. Discussion paper 01/518, University of Bristol, UK
8- Erlandsen S. (2003), Age structure effects and consumption in Norway. 1968(3)–1998(4). Working paper 1, Norges Bank.
9- Erlandsen S,  Ragnar N (2006) Consumption and population age structure, Published online: 16 Springer-Verlag 2006.
10- Fair RC, Dominguez KM (1991) Effects of the changing U.S. age distribution on macroeconomic equations. Am Econ Rev 81.
11- Halvorsen E (2004) Three essays on household savings in Norway. Ph.D. thesis, University of Oslo
12- Higgins M (1998) Demography, national saving, and international capital flows. Int Econ Rev.
13- Horioka CY (1997) A cointegration ananlysis of the impact of the age structure of the population on the household saving rate in Japan. Rev Econ Stat 79.
14- Leff NH (1969) Dependency rates and savings rates. Am Econ Rev 59.
15- Lettau, M & Ludvigson, S ( 2001). Understanding Trend and Cycle in Asset Values: Bulls, Bears and the Wealth Effect on Consumption, CEPR Discussion Papers 3104, C.E.P.R. Discussion Papers.
16- Martin, Robert F. (2003) Consumption, Durable Goods, and Transaction Costs, International Finance Discussion Papers, Board of Governors of the Federal Reserve System.
17- McMillan HM, Baesel JB (1990), The macroeconomic impact of the baby boom generation. J Macroecon 12.
18- Hoover, K.D (2009), The Integration of Micro and Macroeconomics from a Historical Perspective,University of São Paulo, Brazil, 35.
19- Parker JA (1999), Spendthrift in America? On two decades of decline in the U.S. saving rate. In: Bernanke B, Rotemberg J (eds) NBER macroeconomics annual. MIT, Cambridge, Massachusetts.
20- Robidoux. B and Bing-Sun Wong (1996), The Canadian Economic and Fiscal Model (1996 Version), Department of Finance