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Moving on with my series on the Greek crisis I ‘d like to take a brief statistical look on consumption behavior during the last few years. Since the Euro era provided most of the population with a large supply of consumer credit, it is reasonable to try and test the Permanent Income Hypothesis. According to it, most people maintain a ‘permanent’ view of their lifetime income and walk on a stable consumpion path smoothed by use of of savings and credit. One way to represent such a path is:

Ct+1 = Ct + ε

meaning that real consumption per head is equal to last year’s consumption plus a random variable. Regressing the above equation on the 1995 – 2011 period (using ‘Real Private final consumption expenditure per head’) leads to:

Ct+1 = 1.0114Ct + ε with very large R² and highly significant statistical testing.

In other words, it seems that consumption lead a smooth path with a 1.14% annual rise. Looking into residuals there are some interesting results:

Greek consumption residuals

The residuals are large and positive, especially after 2000. Ever since 2009 a ‘regime change’ seems to have occured with very large negative residuals. Taking residual statistics for the 1996 – 2008 period, they have a mean of 236.88 and standard deviation of 115.28. Assuming they correspond to random errors which are normally distributed, all residuals should be positive with 95% probability. As a result, 2009 – 2011 residuals are clearly outliers and point to a large change.

The main possible reasons for this shift are:

  1. Credit constraints on households which are no longer able to smooth their consumption through credit.
  2. Permanent changes on future income expectations which are updated with new data each year and lead to even lower expectations.

Answering which of the above explains a larger part of the shift is quite important since, in case (1) is highly significant, a change in credit supply can provide for a short-term rebound in consumption. Unfortunately, no detailed data is available in order to reach into a conclusive view. Large shifts in permanent wages and pensions, 25% unemployment and more than 25% loss in property value points to a large change of permanent income and credit worth which should probably make the above changes long lasting.

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Kostas Kalevras

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