Consumption & Savings Behavior in Pakistan

Like many other countries, aggregate consumption constitutes a major portion of Gross Domestic Product (GDP) in Pakistan. Consumption decisions determine savings decisions. In long term growth literature, differences in long term growth had been explained to a large extent by differences in the rate of savings which also determine a country’s investment in productive capacity, developing human capital and improving socio-economic infrastructure. In this study, we test three famous consumption models in the literature for their empirical verification taking macro level data for Pakistan economy. These include Keynes (1935) consumption function, Robert Hall’s (1978) Random Walk Hypothesis and Milton Friedman’s (1957) Permanent Income Hypothesis. Furthermore, we also run two multiple regression models using Ordinary Least Squares (OLS) approach to study the determinants of savings in Pakistan economy. The results indicate evidence of consumption smoothing and relatively stable Average Propensity to Consume (APC) in the long run. In the second set of models for analyzing determinants of saving, it was found that nominal national savings are positively related with aggregate level of income and exports while negatively related with wealth variables like total market capitalization of stocks. In line with theory, it was found that nominal national savings are negatively associated with federal debt, government expenditure and inflation. In the alternate model taking variables in growth form, it was found that national savings rate is positively related with GDP growth rate, exports to GDP ratio, remittances growth rate and negatively related with rate of inflation.