This paper explores aggregate consumption behaviour in four developing countries under the assumption that consumers’ planning horizons do not extend over their expected lifetime. Under certain conditions, the resulting ‘moving planning horizon model’ suggests that changes in current income would exert considerably more influence over current consumer spending than is predicted by forward-looking theories of consumption which typically assume that consumers’ planning horizons coincide with expected lifetime. Estimation of the model for the group of developing countries provides empirical support for the role of changes in current income in influencing the consumption process. The results also reveal that consumers are relatively short-sighted since the length of the planning period of consumers ranges from just over ten months. An important implication of these findings is that policy measures can be effective not only if they influence consumers’ permanent incomes but also if they affect changes in current income.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics