RELEVANCE OF LIFE-CYCLE HYPOTHESIS FOR LOW-INCOME COUNTRY: AN EMPIRICAL INVESTIGATION FROM PAKISTAN

Abstract

This study investigates the nexus between wealth and aggregate
consumption, under the lifecycle hypothesis. The study covers annual
time-series data from 1973 to 2015 where dynamic-OLS (DOLS) is
applied for estimating this nexus for Pakistan. However in order to check
the robustness Ridge regression is also applied, which endorse the finding
of original estimates. The study results show that MPC out of income is
ranges from 0.55 to 0.59, while the wealth coefficient is insignificant with
negative sign. Further the age-structure variables i.e. overall dependency
and working age dependency ratio both have negative effect on
consumption. The overall results refuted the lifecycle conjecture in case of
Pakistan, as the wealth has in-significant effect on consumption and
dependency ratios have contradictory sign against the lifecycle assertions.
The non-existence of lifecycle hypothesis may be, plausibly, due to some
distinctive feature of Pakistani society. Such as, the significant negative
sign of dependency ratio support our social behavior where old-age
people sacrifice their consumption for younger and another motive is
bequest which certainly dominates in Pakistani society.
JEL Classification: D10; D12; E21.
Keywords: Aggregate Consumption; Wealth; Lifecycle Hypothesis;
Pakistan