NIGERIA CONSUMPTION FUNCTION – AN EMPIRICAL TEST OF THE PERMANENT INCOME HYPOTHESIS

Consumption plays a significant role in determining the size of the multiplier and the dynamic effects of the economy shock. It also constitutes the largest component of the aggregate expenditure of an economy. As a result, economists have propounded theories in a bid to explain the determinants of consumption. These theories include the absolute income hypothesis by Keynes, relative income hypothesis (RIH) by Duesenberry, permanent income hypothesis (PIH) by Friedman, and the life-cycle hypothesis (LCH) by Modigliani. The objective of this study is to test the performance of the PIH as a description of consumption expenditure in the Nigerian economy using annual time series data over the period 1980-2015. Using the Partial Adjustment Model (PAM) and the Adaptive Expectation Model (AEM) the study found that there exist a long-run relationship between consumption and income thus suggesting that consumption function under the PIH holds for the Nigerian economy.