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Determinants of private consumption

A. Bayar and K. Mc Morrow

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This paper looks at the evolution of consumption theory over time and critically examines the widely accepted permanent income / life cycle hypotheses concerning consumer behaviour in terms of the empirical evidence. Attention is also devoted to the role of time horizon, time preference and capital market imperfections in determining the consumption / savings split of individual consumers. The paper points out the forecasting inadequacies of an essentially Keynesian framework due to its insufficient attention to expectations and forward looking behaviour. The likely key influences on consumption trends in the Community over the medium to long run are examined including the reaction of consumption to both ongoing budgetary consolidation and financial liberalisation, the impact of taxation and social welfare reforms and finally the effect of demographic changes.

(European Economy. Economic Papers. 135. May 1999. Brussels. 32pp. Tab. Bibliogr. free.)

II/108/99/EN (online)

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