Welfare Implication of determinants affecting aggregate consumption expenditure

ABSTRACT:

The research on welfare implication of determinants affecting aggregate consumption expenditure was

conducted by taking Rwanda as an area of study, period 1995- 2015. The researcher’s main purpose was

to evaluate the impact of gross domestic product, lending interest rate, inflation rate and exchange rate

on consumption expenditure in economy. To achieve the desired objectives, the researcher analyzed

how independent variables of the Gross consumption expenditure (GDP, Lending Interest rate, Inflation

rate and Exchange Rate) work and how they affect the dependent variable (GCE). Augmented DickeyFuller

(ADF) and Phillips- Peron (PP) tests were used for stationarity test. Engle- Granger two steps

procedure and the Johansen Maximum Likelihood Methodology were used to see whether variables are

co-integrated or not. The series analysis was done using Eviews 8 Software. Those tests revealed that

there is co-integration among variables. The researcher found that the economic authorities in Rwanda

use different tools of monetary policy and fiscal policy in order to stabilize the economy, using

determinants such as: money supply, government spending, credit control, interest rates and other

monetary and fiscal measures can be manipulated by the economic authorities of Rwanda to maintain

welfare of the society.

Keywords:

Gross consumption expenditure(GCE), Inflation rate measured by Consumer Price Indices(CPI),

Exchange rate, Lending interest rate, , Gross domestic product(GDP).

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LIST 

TABLE OF CONTENTS

APPROVAL .............................................................................................................................. iv

LIST OF TABLES ..................................................................................................................... x

LIST OF FIGURES .................................................................................................................. xi

GENERAL INTRODUCTION................................................................................................. 1

1.Background of the study ........................................................................................................... 1

2.Significance of the study........................................................................................................... 2

3.Scope and period of the study................................................................................................... 3

4.Problem statement..................................................................................................................... 3

5.Hypothesis................................................................................................................................. 5

6.Objectives of the study.............................................................................................................. 6

6.1General objectives................................................................................................................... 6

6.2Specific objectives .................................................................................................................. 6

7.Research methodology.............................................................................................................. 6

7.1Techniques.............................................................................................................................. 6

7.1.a. Documentary technique...................................................................................................... 7

7.1.b. Interview technique............................................................................................................ 7

7.2 Methods.................................................................................................................................. 7

7.2.a. Statistical method .............................................................................................................. 7

7.2.b. Analytical method .............................................................................................................. 7

7.2.c Historical method ................................................................................................................ 8

7.2.d Comparative method........................................................................................................... 8

7.2.e. Econometric method .......................................................................................................... 8

8. Organization of the study......................................................................................................... 8

CHAP I: REVIEW OF LITERATURE................................................................................... 9

INTRODUCTION ....................................................................................................................... 9

Definition of the key concepts..................................................................................................... 9

1.1 Welfare:.................................................................................................................................. 9

1.1.a. The Genesis of the Welfare State....................................................................................... 9

1.2 Consumption ........................................................................................................................ 10

1.2. a. Autonomous consumption............................................................................................... 11

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1.2. b. Marginal propensity to consume..................................................................................... 11

1.2. c Disposable income ........................................................................................................... 12

1.3 National income ................................................................................................................... 13

1.3.a. Definitions of National Income:....................................................................................... 13

1.3.b Concepts of National Income:........................................................................................... 16

1.4 Interest rate........................................................................................................................... 19

1.4. a. Nominal Interest Rate...................................................................................................... 19

1.4.b Real Interest Rate .............................................................................................................. 20

1.4. c Effective interest rate ....................................................................................................... 20

1.5. Inflation rate........................................................................................................................ 20

1.5.1. Causes of inflation ........................................................................................................... 21

1.5.1.a. The cost push-inflation (On the supply side) ............................................................... 21

1.5.1. b Demand-Pull Inflation (On the demand side)............................................................... 22

1.5.2 Keynesian inflation theory................................................................................................ 23

1.6. Exchange rates .................................................................................................................... 24

1.6. a. Nominal exchange rate (e) .............................................................................................. 24

1.6.b. Real exchange rate (ε)...................................................................................................... 24

CHAPTER 2 ANALYSIS OF THE STATUS AND TRENDS OF DETERMINANTS .... 27

INTRODUCTION ..................................................................................................................... 27

2.1. Evolution of gross consumption expenditure in Rwanda 1995-2015 ................................. 27

CHAPTER 3 ECONOMETRIC ANALYSIS OF THE RELATIONSHIP OF ................. 35

INTRODUCTION ..................................................................................................................... 35

3.1 Model specification.............................................................................................................. 35

3.1.1 Hypothesis of the model ................................................................................................... 36

3.1.2. Expected signs.................................................................................................................. 37

3.1.3 Test and analysis of the data ............................................................................................. 37

3.2. Data processing................................................................................................................... 37

3.2.1. Unit root tests................................................................................................................... 37

3.2.1.a. Why testing stationarity?............................................................................................... 37

3.2.1.b. Interpretation of stationarity test.................................................................................. 53

3.3 Estimation of long run model............................................................................................... 53

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3.3.1 Co-integration test............................................................................................................. 53

3.3.2 Interpretation of Johansen Co-integration test output....................................................... 55

3.3.3 Long run output................................................................................................................. 56

3.4 DIAGNOSTIC TESTS ........................................................................................................ 58

3.4.1 Jarque-bera test (Normality test)....................................................................................... 59

3.4.2 Breusch-Godfrey test (Serial correlation LM test) ........................................................... 60

3.4.3 Heteroscedasticity Test (Breusch Pagan Godfrey) ........................................................... 60

3.5 STABILITY TESTS ............................................................................................................ 61

3.5.1 Ramsey reset test............................................................................................................... 61

3.5.2 Recursive estimates (OLS only): Cusum test ................................................................... 61

CONCLUSION………………………………………………………………………………...64

SUGGESTIONS ........................................................................................................................ 64

REFERENCES………………………………………………………………………………...66

APPENDICES ........................................................................................................................... 68

APPENDICES I......................................................................................................................... 69

APPENDICES II........................................................................................................................ 7