Consumption expenditures in developing countries

Consumption expenditures, the largest and major component of aggregate demand, also comprise one of the main sources of economic growth. Particularly, estimating the determinants of consumption expenditures in developing countries is seen very important in terms of economic dynamics and appropriate policy making process. The aim of this study is to estimate different theoretical consumption models for the developing countries divided by income groups and regions. In this context, Keynesian consumption function is estimated for selected 73 countries grouped into three different income levels and regions first. Then, Life Cycle-Permanent Income Hypothesis under rational expectations is estimated with the data collected from 54 countries in three different income groups. In the study, balanced panel data analysis method is applied using annual data for the period of 2000-2011. According to the empirical results, income level is a significant determinant of consumption. Besides, marginal and average propensities to consume are decreasing from low income group towards upper-middle income group. Regionally, the highest marginal and average propensities to consume are estimated for Africa region. Rational Expectations Life Cycle-Permanent Income Hypothesis is seen invalid for developing countries. This finding is derived from liquidity constraints that imperfect capital markets cause, precautionary saving incentive arisen from uncertainty and myopic effects based on households' decisions that are not rational. Overall results indicate the importance of the policies intended for making capital markets more effective and decreasing country risk originated from uncertainty. Keywords: Consumption expenditures, developing countries (DCs), the permanent income, liquidity constraint, panel data analysis.