This paper examines the sources of stickiness in aggregate consumption growth. We first derive a dynamic consumption equation which nests recent developments in consumption theory: rule-of-thumb consumption, habit formation, non-separabilities between both private consumption and hours worked and private consumption and government consumption, intertemporal substitution effects and precautionary savings. Next, we estimate this dynamic consumption equation for a panel of 15 OECD countries over the period 1972-2007 taking into account endogeneity issues and error cross-sectional dependence. To this end, we develop a generalised method of moments version of the common correlated effects pooled estimator and demonstrate its small sample behaviour using Monte Carlo simulations. The estimation results support the labour-consumption complementarity hypothesis, the rule-of-thumb consumption model and the notion that precautionary savings matter for the aggregate economy.

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Tinbergen Institute
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute

Everaert, G., & Pozzi, L. (2010). The Stickiness of Aggregate Consumption Growth in OECD Countries: A Panel Data Analysis (No. TI-049/2). Discussion paper / Tinbergen Institute (pp. 1–35). Retrieved from