An Econometric Analysis of the Determinants of Private Consumption in Cote d’Ivoire

This study investigates the determinants of private consumption expenditure in Cote d’Ivoire using time series data from 1970 to 2016. The Autoregressive Distributed Lags bounds testing approach to cointegration is employed to depict the presence of a long run relationship between private consumption and its determinants and an error correction model is estimated to derive short run dynamics. The results show the presence of a long run relationship among the selected variables. In the long run, current income, wealth and government consumption expenditure play a positive role in determining private consumption, with the effect of current income being higher. Furthermore, consumption expenditure is negatively affected by inflation rate and real interest rate on deposits. In the short run, only income and wealth appear to have positive effects on private consumption while the effects of government consumption, inflation and interest rate were found to be insignificant. This study provides evidence for government to improve the level of private consumption.

ing of these factors would provide valuable information which can be used to guide economic growth and poverty-reducing policies.
As a result, the study on determinants of consumption expenditure has been an area of intensive research since Keynes [2] developed his model of consumption theory. According to the Keynes Absolute Income Hypothesis (AIH), current income is the main determinant of current consumption expenditure and as income increases consumption expenditure also increases but less than proportionately. This implies that the marginal propensity to consume is smaller than the average propensity to consume. However, this theory gives a static explanation of the consumption function since it does not consider individuals expected path of income or time preference for consumption. [3] utilized time series data and found that consumption functions had an insignificant intercept term, implying that average and marginal propensities to consume were the same. This empirical puzzle opened up the opportunity to extend the literature on consumption function. [4] challenged the Keynesian theory of consumption and introduced the Relative Income Hypothesis. According to this hypothesis household consumption depends not just on its current income, but on its income relative to those of its group. Conversely, the Life Cycle Hypothesis due to [5] and [6], stipulates that household consumption depends in part on current income, but also on lifetime expected income and wealth. In other words, households consider their entire life span when making consumption decisions. Similarly, the Permanent Income Hypothesis (PIH) advocated by [7] showed that consumption is determined by permanent income rather than transitory or relative income. Thus, this theory divides the current income into two parts: permanent income and transitory income. Permanent income represents the stable income which households expect to persist into the future while transitory income represents the difference between the short term current income and the permanent income. According to the Permanent Income Hypothesis, only changes in permanent income can alter consumption. This view explains why income is more volatile than consumption and why marginal propensity to consume is higher in long run than in short run. [8] introduced rational expectations into the life cycle and permanent income hypotheses and showed that consumption is a random walk. This implies that unexpected changes in permanent income can affect current consumption. The permanent income hypothesis provides the rational that private consumption responds to changes in permanent income, including asset wealth and human wealth. The introduction of wealth or permanent income into the analysis weakens the relationship between current income and current consumption. One of the key assumptions of these theories is that there exists a perfect financial market in which households can borrow or Based on these theories, a growing body of empirical studies have been undertaken to estimate consumption functions for many individual countries and groups of countries around the world. Most of these works examined the effect of one factor such as income or interest rate in a bivariate framework, ignoring the effects of other relevant factors such as government expenditure, inflation and financial depth. For instance, [9] rejected the PIH in Greece due to presence of liquidity constraints. [10] reported that income has a positive effect on private consumption while interest rate exerts a negative effect in Saudi Arabia. The effect of financial wealth was insignificant. [11] confirmed the positive role of income and broad money supply used as a proxy for wealth in determining private consumption in Saudi Arabia. [12] obtained evidence supporting the absolute income hypothesis rather than PIH in Pakistan due to existence of liquidity constraints. According to [13], private consumption in Iran is positively related to GDP and negatively associated with inflation. [14] rejected the PIH in favor of the AIH for China. Recently, some studies estimated determinants of private consumption by incorporating many explanatory variables into the analysis. In the African context, the empirical evidence is mixed and conflicting. For instance, [15] found no evidence of impact of growth of GDP on consumption expenditure in Tanzania. [16] confirmed the PIH in Ghana. In the case of Cameroon, [17] found that disposable income, price level, interest rate and dependency ratio impacted positively on private consumption. The results obtained by [18] suggested that an increase in income has no significant effect on private consumption in Nigeria. This finding has been challenged by [19] [20] [21] and [22] who reported a positive significant impact of income on private consumption. [23] examined the validity of the PIH for six African countries (Cameroon, Ghana, Kenya, Nigeria, Senegal and South Africa) and found this hypothesis holds in five out of the six countries. [24] and [25] also validated the absolute income hypothesis for Kenya. [26] showed that income and inflation have a long-run positive effect on household spending in Ghana. [27] investigated the case of Lesotho and found that higher income is associated with higher private consumption, while higher inflation and higher interest rates reduce private consumption. These findings contradict with [28] who found that private consumption is positively influenced by income and interest rates on deposits, while inflation has no effect on private consumption. Moreover, government expenditure was found to crowd out private consumption. The remainder of the paper is organized as follows. Section 2 outlines the econometric methodology employed for the empirical analysis. Section 3 reports the empirical findings of the study. Section 4 concludes the study and provides some policy recommendations.

Model Specification
The objective of this work is to estimate a relationship between private consumption expenditure and its macroeconomic determinants. Based on the empirical literature, the econometric model is built upon the following equation: where C t is private consumption, Y t is income, W t stands for wealth, and Z t represents a set of other determinants which captures fiscal policy, liquidity constraints, substitution effects and macroeconomic uncertainty. In this study, Z t includes government consumption expenditure (G t ), inflation rate (INF t ) and real interest rate (r t ).
The impact of income and wealth on consumption expenditure is expected to be positive and smaller than one. The coefficient on government spending is ambiguous. Government expenditure can in some cases crowd in private consumption while in other cases it can crowd it out. The impact of inflation rate is negative because inflation lowers the real value of money balances and financial assets with fixed monetary values. The real interest rate reflects the substitution effects in terms of preference for current or future consumption. A priori, an increase in interest rate induces people to reduce consumption expenditure and increase saving. This substitution effect tends to decrease household consumption expenditure. On the other hand, higher interest rates increase the financial wealth of positive savers which in turn increases their consumption expenditure. Thus, the effect of interest rate is positive when the income effect dominates the substitution effect. The two effects may cancel each other leaving the total effect to be insignificant.

Econometric Methodology
We begin our empirical investigation by examining the time series properties of all variables. This step is necessary to make sure that we do not run spurious regressions. To this end, we apply the unit root tests of [29] and [30]. The second  [31]. One of the reasons for using the ARDL technique is that it is applicable irrespective of whether the regressors are stationary at level or stationary at first difference. It also performs better for small sample sizes than other cointegration techniques. It allows variables to have different optimal lags. The ARDL approach is based on the following error-correction model: The presence of long-run relationship among the variables is tested using the F-test statistic with the null hypothesis of no long-run relationship being H 0 : to be compared with two critical values bounds generated by [31]. If F-statistic is smaller than lower bound, then there is no long run cointegration relationship among the variables. If F-statistic is greater than upper bound, then there is long-term relationship among the variables. If F-statistic is between lower and upper bounds, then the results are inconclusive and different method is required.

Data
The study uses annual data covering the period 1970-2016. Variables used include private consumption measured as household real final consumption expenditure (C t ), real GDP used as a proxy for income (GDP t ), real financial wealth (W t ), real government final consumption expenditure (G t ), inflation rate

Empirical Results and Discussion
As indicated in the methodology, we begin our empirical analysis by examining the time-series properties of the variables. The results displayed in Table 2 [37]), but contradicts with [18] and [19] who found no significant effect of gross domestic product on private consumption expenditure. The coefficient on government consumption is about 0.3 and significant, implying that an increase of 1% in government final consumption causes household consumption expenditure to rise by 0.3%. This evidence strongly indicates that government expenditure has a complementary relationship with private consumption. Therefore, government expenditure can be used to induce household consumption growth. This finding supports the Keynesian effects of fiscal policy on private consumption.
The impact of inflation on household consumption is negative and significant, implying that increases in the level of inflation lessen the level of goods and services demanded by households. This finding lends support to the real balance effect of inflation. Finally, the effect of interest rate on consumption is negative and significant implying that higher interest rates on deposits reduce private consumption. This finding suggests that the substitution effect outweighs the income effect in respect of the choice between saving and consumption. Our findings for inflation and interest rate are in line with [27] who found that higher inflation and higher interest rates reduce private consumption.
We have estimated the error correction model to obtain short run dynamic relationship and results are reported in Table 5. The coefficient on the lagged error correction term is negative and statistically significant, supporting the existence of a long run relationship between private consumption and its determinants. The estimated short run elasticity of current consumption with respect to current income is 0.473 and is highly statistically significant at the 5% level. This means that a 1% increase in current income will result in a 0.478% rise in private consumption. However, the long run impact of income on private consumption is greater than in the short run. This could mean that households save more and consume less in the short run than in the long run as income grows. The coefficient on income is higher than those of the other variables both in the short and long run. This shows the strong relationship between current consumption and current income, as advocated by the Keynesian theory of consumption. The

Conclusions and Recommendations
The aim of this study was to investigate the determinants of private consump- on consumption in the short run was found to be less than it was in the long run.
Moreover, private consumption has been found to be more sensitive to current income as indicated by a higher elasticity. Overall, the results reported in this study support the Keynesian theory of consumption. The excess sensitivity of consumption to current income indicates the existence of a robust incomeconsumption relation. In such a context, income tax reduction can have a considerable impact on household consumption expenditure. The positive relationship between government spending and private consumption also suggests that government spending can be used to stimulate aggregate demand and economic growth in Cote d'Ivoire in the long run. Also, lower interest rates and inflation are recommended to increase household consumption.
This study does not explain the reasons of the strong relationship between current consumption and current income. Do credits constraints or myopia explain this result? It is important to investigate the validity of these hypotheses to provide valuable policy recommendations to government. We intend to examine this issue in a future research.

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.