The Estimation of a Data-based Consumption Function for Nondurable Consumer Goods and Services

In the recent past, more and more economists have raised the question whether theoretical assumptions made in applied economics correspond to reality. This paper estimates a consumption function for nondurable consumer goods and services which best utilizes the information contained in the data. The function satisfies high statistical standards and has a sound theoretical basis as well. Short-run dynamics are modeled together with long-run equilibrium behavior. The results show that short-run responses to changes in the determinants (income, prices) are smaller than those in the long run because consumers adapt their behavior to changes in the environment if these changes are viewed as permanent. This produces the stabilizing effect of consumption over the business cycle.