Paper title: Estimating the Consumption Function under the Permanent Income Hypothesis: The Case of Bangladesh
Abstract: This study aims to examine and estimate the consumption function in Bangladesh under Friedman’s (1957) permanent income hypothesis (PIH) by adopting the adaptive expectations model. The study covers a data period of 40 years starting from FY 1982 to FY 2021 with annual observations in real terms. At first, a two-stage Engle-Granger cointegration test has been employed to estimate the elasticities of consumption both in the short and long run for Bangladesh along with an estimation of the adaptive expectations coefficient. The short-run MPC value is 0.6299. Consumption elasticity with respect to permanent income is 0.8397 provided the increase in income sustains in the long run. Given the values of consumption elasticity, it can be inferred that the consumers will realize 75% of their expectation in any period because the adaptive expectation coefficient has been estimated to be 0.7501. In the second approach, we regress changes in consumption as a function of changes in income and changes in one period lagged consumption since all these variables are found to be stationary at first difference. Both approaches lend support for consumption function formed in line with PIH and adaptive expectation hypothesis in Bangladesh. Keywords: Consumption, Income, Permanent Income Hypothesis, PIH, MPC DOI: https://www.doi.org/10.61607/JFB.V20N1-2.A3 Article Info: Submission Date: January 11, 2023; Acceptance Date: March 07, 2023.
