How does Economic Theories of Consumption Apply to the Observed Consumption Patterns in Denmark? A Theoretical and Empirical Analysis

Abstract

Household consumption is a well-established economic concept, which has been the source of many economic developments since the 1920s. Various economic theories are identified as relevant in explaining household consumption, and so the focus of the thesis has been to uncover how the permanent income hypothesis and life-cycle model can help explaining the patterns observed in Danish consumption data.

By applying empirical data to Hall’s recognized model of random-walk, it is tested whether Danish household consumption patterns can indeed be confirmed to reflect the theories put forward in the permanent income hypothesis and life-cycle model. Considering a time series dataset of empirical observations of household consumption in the period 1994-2018, it cannot at first examination be rejected that household consumption could follow a random-walk model. When the empirical dataset is extended to consider other variables’ possible impact on current household consumption, the hypothesis of household consumption being the only relevant and significant explanatory variable is rejected however. Both disposable income and wealth are shown to be significant independent variables and thus helpful in explaining Danish consumption patterns.