Modelling Aggregate UK Consumption Functions: A Time-Series Analysis

This is a time-series analysis aimed primarily to test different macroeconomic models of consumption or more specifically to test the consumers’ non-durable expenditure in the United Kingdom. It aims to examine the extent to which household consumption (the exogenous variable) is directly related to present income (the endogenous variable) but also to investigate the influence of past income levels.The study involves Ordinary Least Squares (OLS) regression of aggregate United Kingdom consumption data to econometric functions although focus is on the Keynesian and DHSY models.The period that is covered in this dissertation is between 1936 when Keynes introduced marginal propensity to consume and 2004. Therefore the literature review includes a mixture of both classical and recent works.There are many potential issues in modelling the aggregate UK consumptions using time-series data. One example is the existence of uncontrolled economic factors. Thus the economic reason for pursuing this study is to investigate how the components of the model relate to each other and to analyse the causes of the consequently biased models.