THE PRIVATE CONSUMPTION FUNCTION IN ISRAEL

Arnon Barak ()
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Arnon Barak: Bank of Israel

Israel Economic Review, 2018, vol. 16, issue 1, 65-103

Abstract: The objective of this study is to identify and quantify the factors affecting private consumption in Israel. For that purpose, an aggregate private consumption function in Israel was estimated for the years 1995 to 2015, using a standard error correction model that uses quarterly data, giving it the advantage of being able to identify short-term effects. In order to specify the long-term link independent of the stationarity of the variables, we estimate an ARDL (Autoregressive Distributed Lag) econometric model, and carry out a bounds test. The main findings are that in the long term, private consumption is determined mainly by income from labor and by financial assets, and that home values and global trade (beyond its effect through income) are also important. The elasticity of consumption in the long term is estimated at about 0.3 relative to income from labor and about 0.2 relative to the net financial assets portfolio. In contrast, in the short term, private consumption is positively affected mainly by changes in financial assets, and its elasticity relative to them is estimated at about 0.15. Current income has an effect primarily through transfer payments (elasticity of about 0.1), while the coefficient of income from labor in the short term is not significantly different from zero. Finally, the interest rate has a direct effect on consumption after one year (although not within the quarter), and surprisingly, we did not find evidence of the security situation having an effect.

Date: 2018
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