Consumption and macroeconomic policies (original) (raw)

2007, International Journal of Development Issues

The paper examines asymmetry in the cyclical behavior of private consumption. The empirical model includes three policy variables: government spending, the money supply, and the exchange rate. Anticipated movements in these variables are likely to vary with agents' forecasts of macroeconomic fundamentals and, therefore, determine planned consumption. Unanticipated policy changes, in contrast, determine cyclical consumption. Using data for a sample of nine developing countries in the Middle East, fluctuations in private consumption are mostly cyclical. The stabilizing function of policy shocks varies across countries and appears to be asymmetric within countries. The evidence of asymmetry necessitates that the policy stance be carefully designed to maximize its desired effects on private consumption, the largest growing component of aggregate demand in many developing countries.