Habits, Rule-of-thumb Consumption and Useful Public Consumption in Sub-Sahara Africa: Theory and New Evidence

Abstract

AbstractAggregate consumption behaviour of private agents is central in the mediation and effectiveness of macroeconomic policies, and it is therefore of first-order importance. In this paper, I derive and estimate a structural consumption model for a panel of 34 sub-Sahara African (SSA) countries from 1960 to 2018 to provide new evidence on three important aggregate consumption behaviours—habit formation, rule-of-thumb consumption behaviour and the complementarity of government consumption in private utility. The following key findings emerge. (1) There is evidence of habit formation in aggregate consumption. (2) Approximately 38% of consumers follow the rule-of-thumb of consuming their current income suggesting a deviation from the permanent income hypothesis in SSA. However, this rule-of-thumb consumption behaviour in the data is driven by the period before the mobile banking/money era that emerged post-2000s. (3) Public consumption complements private consumption in an Edgeworth–Pareto sense. This suggests that expansionary fiscal policies involving increases in government consumption can be an effective vehicle in stimulating aggregate demand via a positive marginal utility channel. These findings are robust to demographic factors and stable under different model assumptions.