Real Private Consumption Expenditure Modeling: An Empirical Study on Pakistan

Abstract

This paper presents a model for Pakistan’s real private consumption expenditure, with the aim of generating a better understanding of the factors that determine private consumption in Pakistan and for the purpose of forecasting consumption expenditure growth. The model is estimated over period 1971 to 2012 as an (ARDL), allowing for lagged terms so as to capture dynamic adjustment effects. The results suggest that Pakistan’s real private consumption adjusts fast to equilibrium levels in the current period (t), from a disequilibrium experienced in the previous period (t-1). In the short run, real private consumption growth is significantly affected by changes in wealth and unemployment rate. The relationship between consumption, wealth income, rate of interest and unemployment rate. Both the wealth variable and unemployment are significant in determining long run consumption growth, moreover, results of the forecast evolution indicate that the parsimonious short run model has the potential to provide reliable consumption forecasts in the medium term.