MODELLING PRIVATE CONSUMPTION IN CHINA FROM 1987 TO 2012

Abstract

This study estimates the consumption function of China by applying the Absolute
Income Hypothesis and the Permanent income Hypothesis. The study applies
Autoregressive Distributed Lag model and co-integration analysis to estimate the
consumption function in China, in utilizing a time series dataset from 1987 to 2012. The
results of this study reveal that in the long run current income and wealth are
statistically significant, whereas variables such as unemployment and interest rates are
not significant vis-à-vis private consumption. However, in the short run all of the
regressors are statistically significant and hence have an impact on real private
consumption. The [-0.095] value of Error Correction Mechanism (-1) that maintains a
negative sign and significant with certain level of significance, shows the speed of
adjustment of private consumption that turns into a state of equilibrium in next period
from disequilibria.