Private consumption in Taiwan, 1981-2011 (Kevin Hsieh, Nicole Mun Sim Lai, and An-Chi Tung)

Per capita private consumption, whether in real terms or as a percentage of gross domestic product (GDP), exhibits a long upward trend in Taiwan. Some studies report that the consumption age profile estimated each year varies considerably over time, and younger cohorts experience faster consumption growth than older ones. These findings pose a strong challenge to the consumption smoothing predictions of the Life Cycle/Permanent Income Hypothesis (LCPIH).

The literature has mixed empirical results on LCPIH and does not agree on the relationship between growth, demographic change, and consumption (or saving). With better methodology and more up-to-date data, we re-examine these issues by estimating the age, period, and cohort effects of private consumption, test whether prudence and habit formation determines consumption, and study how economic growth and demographic change affect the level, shape, and change in consumption patterns.

Our data are estimated under the NTA framework, based on the Family Income and Expenditure Surveys of 1981-2011, which can be re-arranged by cohorts. For our dependent variable, we experiment with different definitions (all, non-durables, or by sub-category) and estimating techniques (equivalence scale or regression). For the independent variables, besides the usual age, period, and cohort dummies, we may include real income (to reduce the over-sensitivity of consumption data), income uncertainties, and so on. We employ dynamic pseudo-panel models. We begin with an age-period-cohort analysis, then test various consumption theories, and study whether there are structural breaks (e.g., whether the implementation of National Health Insurance in 1995 greatly reduced the private consumption of health services).

Our findings have important implications for the future. Simple exercises will be performed to compare the impacts of different economic growth rates with different population forecasts. The results suggest how economic stagnation and population aging, the two challenges Taiwan faces now, will alter consumption growth in the future.

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