Habits, Rule-of-Thumb Consumption and Useful Public Consumption in Sub-Saharan Africa: Theory and New Evidence
Francois, John Nana
African Economic Research Consortium
I derive and estimate a structural consumption model for a panel of 34 sub-Saharan Africa countries from 1960–2018 to uncover three important aggregate consumption behaviours: habit formation, rule-of-thumb consumption and the complementarity of government consumption in private utility. The following findings emerge: (1) There is evidence of habit formation in consumption. (2) Approximately 38% of consumers follow the rule of thumb of consuming their current income. This rule of-thumb consumption behaviour in the data is driven by the period before the mobile money era that emerged post-2000s. (3) Public consumption complements private consumption in an Edgeworth-Pareto sense. This suggests that increases in government consumption can stimulate aggregate demand via a positive marginal utility channel.
Habits; Edgeworth complementarity; Rule-of-thumb agents; Fiscal and monetary policy; sub-Saharan Africa