Estimating Aggregate Consumption Function in Indonesia: An Error Correction Approach

Panji Kusumo Prasetyanto(1), Jihad Lukis Panjawa(2), Jalu Aji Prakoso(3*), Suci Nasehati Sunaningsih(4), Deni Ramdani(5)

(1) Faculty of Economics, Universitas Tidar, Magelang – Indonesia
(2) Faculty of Economics, Universitas Tidar, Magelang – Indonesia
(3) Faculty of Economics, Universitas Tidar, Magelang – Indonesia
(4) Faculty of Economics, Universitas Tidar, Magelang – Indonesia
(5) Faculty of Economics, Universitas Tidar, Magelang – Indonesia
(*) Corresponding Author

Abstract

The aggregate consumption pattern in Indonesia tends to be volatile due to economic, social, political instability, and disasters affecting consumption expenditure and social welfare. Relooking at public expenditure and its determinant with the 1992-2019 time series is the focus of current research. This review aims to find out the change of aggregate consumption in Indonesia with the Life-Cycle Hypothesis. The method used to authenticate the research was the Direct Error Correction Model. Using this approach, short- and long-term consumption estimation will be found that is useful to stakeholders. The result of the test shows there is a relationship between determinants and aggregate consumption in Indonesia in both the short and the long terms. In short term, inflation affects the change of aggregate consumption, while in the long term, GDP, interest rate, and inflation affect consumption. Estimation building on hypothesis testing is useful to policymakers, particularly for macro-credential adjustment.

Keywords

Consumption, Gross Domestic Product, Inflation, Interest Rate, Error Correction Model

Full Text:

PDF

References

Diacon, P.-E., & Maha, L.-G. (2015). The Relationship between Income, Consumption and GDP: A Time Series, Cross-Country Analysis. Procedia Economics and Finance, 23, 1535–1543. https://doi.org/10.1016/s2212-5671(15)00374-3

Duesenberry, J. S. (1949). Income, Saving and the Theory of Consumption Behavior. Cambridge, MA: Harvard University Press.

Friedman, M. (1957). Theory of the Consumption Function. Princeton: Princeton university press.

Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics (5th ed.). New York: McGraw-Hill Education. Retrieved from https://www.amazon.co.uk/Basic-Econometrics-Publisher-McGraw-Hill-Education/dp/B00SLRATUU

Hüttel, A., Balderjahn, I., & Hoffmann, S. (2020). Welfare Beyond Consumption: The Benefits of Having Less. Ecological Economics, 176, 106719. https://doi.org/https://doi.org/10.1016/j.ecolecon.2020.106719

Insukindro. (1991). Regresi Linier Lancung Dalam Analisis Ekonomi: Suatu Tinjauan Dengan Satu Studi Kasus Di Indonesia. Jurnal Ekonomi Dan Bisnis Indonesia, 6, 1–13.

Kaplan, G., & Violante, G. L. (2010). How much consumption insurance beyond self-insurance? American Economic Journal: Macroeconomics, 2(4), 53–87. https://doi.org/10.1257/mac.2.4.53

Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. London: Macmillan.

Khan, A. H. (1987). Aggregate consumption function and income distribution effect: Some evidence from developing countries. World Development, 15(10–11), 1369–1374. https://doi.org/10.1016/0305-750X(87)90130-6

Khan, K., Fei, C., Kamal, M. A., & Shaikh, S. A. (2015). Determinants of Consumption Function, In Case of China and G7 Countries. International Journal of Economics and Empirical Research, 3(4), 202–210.

Mei, Y., & Kim, Y. K. (2012). U . S . Consumption Function : An Empirical Test of the Life-Cycle Hypothesis U . S . Consumption Function : An Empirical Test of the Life-Cycle Hypothesis By : Yuan Mei Advised by :

Modigliani, F., & Brumberg, R. (1954). Utility analysis and the consumption function: an interpretation of cross-section data (In Post Ke; K. K. Kurihara, Ed.). London: George Allen & Unwin.

Neuman, W. L. (2011). Sosial Research Methods: Quantitative and Qualitative Approaches. Boston: Pearson Education, Inc. Retrieved from https://www.pearson.com/us/higher-education/program/Neuman-Social-Research-Methods-Qualitative-and-Quantitative-Approaches-7th-Edition/PGM74573.html

Nur, E. M. (2012). Konsumsi dan Inflasi Indonesia. Jurnal Kajian Ekonomi, 1(April), 55–77.

Palley, T. I. (2010). The Relative Permanent Income Theory of Consumption: A Synthetic Keynes–Duesenberry–Friedman Model. Review of Political Economy, 22(1), 41–56. https://doi.org/10.1080/09538250903391954

Resagi, M. H. (2020). The Determinants of Consumption in Indonesia 2010 - 2018. Indonesian Journal of Development Economics, 3(3), 950–958.

Rusdiana, A., Mulyawan, S., Djati, S. G., Indonesia, W. J.-, Djati, S. G., & Djati, G. (2020). The Relatioship Between Scioeconomic status and COnsumption Pattern of Fishermen Household in Indonesia. Asian Journal of Agriculture and Rural Development, 10(1), 141–148. https://doi.org/10.18488/journal.1005/2020.10.1/1005.1.141.148

Sapci, A. (2017). Costly financial intermediation and excess consumption volatility. Journal of Macroeconomics, 51, 97–114. https://doi.org/10.1016/j.jmacro.2016.12.003

Wijaya, A., Za, S. Z., Darma, D. C., Tinggi, S., & Ekonomi, I. (2020). Life-Cycle Hypothesis for Consumption Pattern : Example from Indonesia. International Journal of Advanced Science and Technology, 29(4), 4712–4720.

DOI: 10.23917/jep.v23i1.16104

Article Metrics

Abstract view(s): 420 time(s)
PDF: 654 time(s)

Refbacks

  • There are currently no refbacks.