Turkey's consumption function: An econometric application

In order to make an efficient and also a useful economic policyrecommendation a reliable macro economic model is needed. Whereas therehave been numerous approaches aiming at modelling the consumption functiona great deal of difficulties have been faced in empirical testing and gathering thedata. For this reason, it is of great importance that individual country shoulddevelop its own macroeconomic model by using the relevant data whichperfectly explains its own consumption behaviour.The purpose of this thesis is to analyse Turkey?s consumption functionthrough fractional cointegration method developed by Geweke Porter-Hudak in1983. The main contribution of this study is that it deals with the fractionalstructure of the variables used in the model. Fractional unit root tests areapplied and the series are found to have fractional unit roots. Thus, biasedresults would have been reached if conventional unit root tests had been appliedwhich do not take into consideration the so-called fractional form.In this study, Turkey?s consumption function is estimated by usingfractional cointegration procedure. According to the estimation resultsconsumers in Turkey behaves in accordance with the Life Cycle-PermanentIncome Hypothesis. As far as the findings are concerned income and wealth arethe main factors determining the consumption expenditures in Turkey in thelong-run. When short-run consumption model is analysed it is seen thatFractional Error Correction Model works. Accordingly, when a variation takesplace in income and wealth, consumers in Turkey adjust their consumptionbehaviours by reaching the evident indicators as to the continuity of theaforementioned variation.