Reconsidering the Consumption and Income Dynamic in the United Kingdom with the Dual Adjustment Approach

This study attempts to analyse the relationship between household consumption expenditure and income from 1970 to 2020 in United Kingdom. We used the EngleGranger Cointegration Analysis and the Dual Adjustment Approach to investigate the co-movements of consumption and expenditure. Our results provide evidence on the existence of co-trending between household expenditure and income levels. Further, we found evidence for singular adjustment and against dual adjustment in the UK for the given period. That is, we found negligible difference between the effects of permanent and transitory income on household expenditure. Our findings suggest that Dynamic Keynesian Consumption Function may be valid for the UK. However, there is also evidence on the weak version of Permanent Income Hypothesis and hence there is room to research further for weak version of Permanent Income Hypothesis to provide a stronger theoretical explanation. Our findings lend support for monetary and fiscal interventions in macroeconomic policy making. Keywords: Household Consumption Expenditure, Income, Cointegration, Dual Adjustment, Permanent Income Hypothesis, United Kingdom