The effect of income uncertainty on consumption expenditure in developed and developing countries

Income uncertainty is thought to be influential on the economic decisions of households such as consumption and investment. There are many theoretical models related to this effect in the literature. According to the precautionary saving model which is one of these models, there is a positive relationship between income uncertainty and future consumption expenditures. In the study, using the variables of consumption growth, income uncertainty, income growth, inflation rate and population growth rate covering the 1985: 2015 period for the groups of developed and developing countries, the positive correlation was analyzed with the help of panel VAR method. In this study, estimates of conditional income expectancy obtained by GARCH method are used as income uncertainty considering the basic trends in the literature. Findings from the study support the precautionary savings hypothesis. In addition, the effect of income uncertainty on consumption expenditures appears to be greater in developing countries than in developed countries. It is also seen in the findings that the persistence of the effect of income uncertainty on consumption expenditures is greater in developed countries than in developing countries. According to another analytical finding, the rate of inflation included in the model increases the sensitivity of consumption to income uncertainty in developed countries, whereas it decreases in developing countries. Finally, the population growth rate included in the model increases the sensitivity of consumption to the uncertainty of income in developed countries, while it does not cause any changes in developing countries. Key Words: Income Uncertainty, Consumption Expenditure, Panel VAR, Developed Countries, Developing Countries