Estimation of the consumption function under the permanent income hypothesis: Evidence from Zambia
Lincoln Daka, Humphrey Fandamu, Kapena Sumbye
The aim of this paper is to examine Zambia’s consumption function under the permanent income hypothesis. The study employs an annual time series data from 1971-2014 to estimate both the short-run and long-run elasticities of consumption for Zambia. The autoregressive distributive lag (ARDL) cointegration approach is used. It is found that there is a wide difference between the elasticity to consume out of current income and the elasticity to consume out of permanent income. Therefore, we conclude that the permanent income hypothesis (PIH) is valid in the case of Zambia. It is found that increases in the interest rates tend to lower significantly interest-sensitive consumption expenditure in Zambia. The overall conclusion drawn from the study is that government policies that are aimed at improving the disposable income of Zambian households, in order to stimulate consumption and economic growth, must be permanent or sustained long enough for their full effect to materialize.