Determinants of Consumption and Savings Behavior in Developing Countries

The World Bank Economic Review (Impact Factor: 1.13). 02/1989; 3(3):379-93. DOI: 10.1093/wber/3.3.379
Source: RePEc


The determinants of savings generally and the specific effects of government policies on savings and consumption are pivotal forces in investment and economic growth. The Hall hypothesis states that consumption is a function of lifetime (“permanent”) income, rather than income in each period independently. Changes in interest and tax rates, money supply, or government expenditure will affect permanent income and hence consumption and savings only if they are unexpected and thus not already incorporated in the estimation of permanent income. We are unable to reject the Hall hypothesis in tests for developing countries when we allow for varying interest rates. We do find evidence of a negative effect of inflation on consumption, and a positive relationship between the real interest rate and consumption. The evidence for the Hall hypothesis also suggests that Ricardian equivalence may be valid—this is Barro's hypothesis that the effect on savings is the same whether government deficits are financed through taxation or debt. Our preliminary testing, however, does not support Ricardian equivalence.

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Available from: Lakshmi Raut, Jul 02, 2014
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    • "Furthermore, especially, due to lack of available and/or reliable long-run data in case of developing countries like Turkey, it is not feasible to consider in empirical studies on consumption. Therefore, most of empirical studies estimating the effects of government policies, i.e. raising taxes, for developing countries are based on estimations of Keynesian consumption functions (Raut and Virmani, 1990). So, in this paper we prefer to analyze the effects of tax shocks on the components of private consumption expenditure in the context of Keynesian consumption theory, but with a newly developed as well as more suitable econometrical model for fiscal policy related studies, the SVAR. "
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    ABSTRACT: The purpose of this paper is to analyze empirically the short- and long-run effects of tax shocks on private consumption expenditure on component basis in Turkey. To do so, first, we decomposed private consumption expenditure into four major sub-categories, including food, education, and transportation, among others. And then, we employed a Structural VAR (SVAR) model which was calibrated to quarterly data set for the period 2003:Q12013:Q3. Specifically, our empirical findings show that the effects of tax shocks on the components of private consumption expenditure differ in the short- and long-run. In the short-run, all the taxes which we considered have a significant effect on the components of private consumption expenditure, whereas in the long-run only two taxes the VAT and the personal income tax– affect it. However, it is important to highlight that the components of private consumption expenditure are much more affected by the VAT in the both short- and long-run. In brief, the findings reveal that the effects of tax shocks on private consumption expenditure shows difference, changing according to sorts of taxes, components of the expenditure, and the length of period.
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    ABSTRACT: This paper investigates the empirical relevance of the permanent income/life cycle hypothesis under rational expectations (REPIH) within the context of the small open developing economies of the Caribbean region. The evidence presented would tend to strongly reject the REPIH for all cases except the inconclusive case of Barbados. Generally, the coefficient on the expected income term is highly significant probably implying the existence of liquidity constraint due to imperfect capital markets.
    The North American Journal of Economics and Finance 03/1992; 3(1-3):21-37. DOI:10.1016/1062-9408(92)90010-O · 0.76 Impact Factor
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    Handbook of Development Economics 02/1993;
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