Permanent income hypothesis and the consumption function to Ecuador. Evidence for the period 2000-2018
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Abstract
The main objective of the present study is to estimate an aggregate private consumption function for the Ecuador’s economy. For this, the relevance of Friedman's permanent income hypothesis (1957) is contrasted as an approximate description of the country's consumption. In order to verify empirically, quarterly information was used during the period 2000: q1-2018: q4, which was modeled on an estimate of two linear regressions based mainly on the streamlined Koyck model (Gujarati and Porter, 2010), using Ordinary Least Squares (OLS) and Ordinary Least Squares in 2 Stages (OLS2S). The results suggest that aggregate consumption in Ecuador is adjusted to the level of real income with a considerable lag. It allows to evidence in favor of the hypothesis of permanent income, in the sense that household consumption expenditure responds more to changes in permanent income than in transitory income or the current period.
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