THE PREDICTABILITY OF AGGREGATE CONSUMPTION GROWTH IN OECD COUNTRIES: A PANEL DATA ANALYSIS

We examine aggregate consumption growth predictability. We derive a dynamic consumption equation which encompasses relevant predictability factors: habit formation, intertemporal substitution, current income consumption and non-separabilities between private consumption and both hours worked and government consumption. We estimate this equation for a panel of 15 OECD countries over the period 1972–2007, taking into account parameter heterogeneity, endogeneity and error cross-sectional dependence using a GMM version of the common correlated effects mean group estimator. Small-sample properties are demonstrated using Monte Carlo simulations. The estimation results support income growth as the only variable with significant predictive power for aggregate consumption growth.