Keywords: Myopia, Liquidity Constraints, Loss Aversion, Intertemporal Elasticity of Substitution


This study examines the consumption behaviour in Organization of Islamic Cooperation (OIC) countries. It presents empirical evidence on rational expectations permanent income hypothesis (RE-PIH) and tests whether the phenomena of myopia, liquidity constraints or loss aversion impede forward-looking consumption behaviour. It also attempts to measure the intertemporal elasticity of substitution. The empirical evidence defies the existence of consumption smoothing phenomena as postulated in RE-PIH. The results support loss aversion. The response of consumption to unexpected income changes is statistically significant in only one-third of the countries. In contrast, the response of consumption to expected income changes is statistically as well as economically significant in as many countries. The intertemporal elasticity of substitution is also statistically insignificant in most of the countries and the elasticity is generally not positive. For the Islamic finance industry, the results help in explaining the low penetration of equity-based risk sharing instruments. From the policy perspective, the excess sensitivity of consumption to income suggests that redistribution efforts to enhance incomes of poor could help in enhancing their consumption levels.


Author Biographies

Salman Ahmed Shaikh, SZABIST, Karachi
PhD Scholar in Economics at National University of Malaysia. He did BBA Finance from Bahria University, MS Finance from SZABIST and Masters in Economics from Institute of Business Administration. He has published several papers in Scopus indexed and WoS journals as well as chapters in books published by WoS publishers. He has presented in research conferences held in Turkey, Indonesia, Malaysia, Brunei and Pakistan. He has taught in Pakistan at Institute of Business Administration and SZABIST. Scopus ID: 57193154814
Mohd Adib Ismail, Universiti Kebangsaan Malaysia, Malaysia

Senior Lecturer, Universiti Kebangsaan Malaysia, Faculty of Economics and Management, Bangi, Malaysia

Scopus ID: 36631945800


Abdul Ghafar Ismail, Universiti Islam Sultan Sharif Ali, Bandar Seri Begawan, Brunei Darussalam

Professor of Islamic Financial Economics, Universiti Islam Sultan Sharif Ali, Department of Economics,

Bandar Seri Begawan, Brunei Darussalam

Scopus ID: 36987804600


Shahida Shahimi, Universiti Kebangsaan Malaysia, Malaysia

Associate Professor and Head of Postgraduate Programs

Universiti Kebangsaan Malaysia

Scopus ID: 37089548200    
Muhammad Hakimi Mohd. Shafiai, Universiti Kebangsaan Malaysia, Malaysia

Senior Lecturer, Faculty of Economics and Management, Universiti Kebangsaan Malaysia, Bangi, Malaysia 

Scopus ID: 57035421100


Akerlof, G. A. (2007). The Missing Motivation in Macroeconomics, American Economic Review, 97(1), 5 – 36.

Ando, A. & Modigliani, F. (1963). The ‘Life Cycle’ Hypothesis of Saving: Aggregate Implications & Tests, American Economic Review, 55 – 84.

Benartzi, S. & Thaler, R. (1995). Myopic Loss Aversion and the Equity Premium Puzzle, Quarterly Journal of Economics, 110, 73 – 92.

Bernanke, B. S. (1985). Adjustment Costs, Durables and Aggregate Consumption, Journal of Monetary Economics, 15(1), 41 – 68.

Bilgili, F., & Bagl, H. H. (2016). Testing the Permanent Income and Random Walk Hypotheses for Turkey. International Journal of Economics and Financial Issues, 6(4), 1371 – 1378.

Bowman, D.; Minehart, D. & Rabin, M. (1999). Loss Aversion in a Savings-Consumption Model, Journal of Economic Behaviour and Organization, 38, 155 – 178.

Campbell, J. & Mankiw, N. (1990). Permanent Income, Current Income, and Consumption, Journal of Business and Economic Statistics, 8(3): 265 – 279.

Deaton, A. (1991). Saving and Liquidity Constraints. Econometrica, 59(5): 1221 – 1248.

Demirgüç-Kunt, A., Klapper, L., & Douglas, R. (2013). Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults. Policy Research Working Chapter No. 6642.

Drakos, K. (2002). Myopia, Liquidity Constraints, and Aggregate Consumption: The Case of Greece, Journal of Economic Development, 27(1): 97 – 105. Empirical Investigation, The Journal of Political Economy, 97(2): 305 – 334.

Fisher, I. (1930). The Theory of Interest. New York: MacMillan.

Flavin, M. (1985). Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia, Canadian Journal of Economics, 18, 136 – 177.

Flavin, M. A. (1981). The Adjustment of Consumption to Changing Expectation about Future Income, The Journal of Political Economy, 89(5), 974 – 1009.

Friedman, M. (1957). Introduction to a Theory of the Consumption Function. In A Theory of the Consumption Function, 1 – 6. Princeton University Press.

Gomes, F. A. R. (2014). A Note on Uncertainty in Savings Decisions: Can a Naïve Strategy Be Optimal? Macroeconomic Dynamics, 18, 1428 – 1435.

Gomes, F. A. R. & Paz, L. S. (2010). Consumption in South America: Myopia or Liquidity Constraints?, Economia Aplicada, 14(2), 129 – 145.

Guvenen, M. F. (2000). Mismeasurement of the Elasticity of Intertemporal Substitution: The Role of Limited Stock Market Participation (No. 2000-E26). Carnegie Mellon University, Tepper School of Business.

Hall, R. E. (1978). Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence, The Journal of Political Economy, 86, 971 – 987.

Havránek, T. (2015). Measuring Intertemporal Substitution: The Importance of Method Choices and Selective Reporting, Journal of the European Economic Association, 13, 1180 – 1204.

Hayashi, F. (1982). The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables, The Journal of Political Economy, 90(5), 895 – 916.

Jappelli, T. & Pagano, M. (1989). Consumption and Capital Market Imperfections: An Intertemporal Comparison, American Economic Review, 79, 1088 – 1105.

Jappelli, T., & Pistaferri, L. (2010). The Consumption Response to Income Changes, Annual Review of Economics, 2, 479 – 506.

Jappelli, T. & Pistaferri, L. (2014). Fiscal Policy & MPC Heterogeneity, American Economic Journal: Macroeconomics, 6(4), 107 – 136.

Johansson, M. (2002). Re-examining Loss Aversion in Aggregate Consumption: Swedish and International Evidence. Lund University.

Juan, J. P. D. & Seater, J. J. (1997). A Cross Country Test of the Permanent Income Hypothesis, International Review of Applied Economics, 11(3), 451 – 468.

Kahneman, D. & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263 – 292.

Keynes, J. M. (1935). The General Theory of Employment, Interest, & Money, New York: Harcourt Brace & World.

Khan, K. & Nishat, M. (2011). Permanent Income Hypothesis, Myopia and Liquidity Constraints: A Case Study of Pakistan, Pakistan Journal of Social Sciences (PJSS), 31(2), 299 – 307.

Kuznets, S.; Epstein, L. & Jenks, E. (1946). Front Matter to National Product Since 1869. In National Product Since 1869. National Bureau of Economic Research.

Lucas, R. E. J. (1976). Econometric Policy Evaluation: A Critique, Carnegie-Rochester Conferences on Public Policy, 1: 19 – 46.

Lusardi, A. (1992). Permanent Income, Current Income, & Consumption: Evidence from Panel Data, Manuscript, Dartmouth College.

Modigliani, F. & Richard, H. B. (1954). Utility Analysis & the Consumption Function: An Interpretation of Cross-section Data, in Kenneth K. Kurihara, ed., Post Keynesian Economics, New Brunswick, NJ. Rutgers University Press, 388 – 436.

Murugasu, D.; Wei, A. J. & Hwa, T. B. (2013). Marginal Propensity to Consume across Household Income Groups. Bank Negara Malaysia, Working Paper No. WP2/2013.

Olekalns, N. (1997). Has Financial Deregulation Revived the Permanent Income/Life Cycle Hypothesis?, Australian Economic Review, 30(2), 155 – 166.

Perez, S. J. (2000). Myopia, Liquidity Constraints, and Aggregate Consumption: What do the Data Say?, Economics Letters, 67(1), 43 – 48.

Roche, M. J. (1995). Testing the Permanent Income Hypothesis: The Irish Evidence, The Economic and Social Review, 26(3), 283 – 305.

Runkle, D. (1991). Liquidity Constraints and the Permanent Income Hypothesis, Journal of Monetary Economics, 27(1), 73 – 98.

Shea, J. (1995). Myopia, Liquidity Constraints and Aggregate Consumption: A Simple Test, Journal of Money, Credit and Banking, 27(3): 798 – 805.

Souleles, N. S. (1995). The Response of Household Consumption to Income Tax Refunds, Manuscript, Massachusetts Institute of Technology.

Stigler, G. J. (1954). The Early History of Empirical Studies of Consumer Behaviour, The Journal of Political Economy, 62(2): 95 – 113.

Treeck, V. T. (2010). Liquidity Constraints versus Loss aversion in Household Consumption: A Simple Reconciliation (Working Paper No. 13/2010). IMK Working Paper Series.

Viard, A. D. (1997). How Forecastable is Consumption Growth? New Evidence on the Hall Random Walk Hypothesis, Applied Economics, 29(11): 1435 – 1446.

Williams, F. M. & Zimmerman, C. C. (1935). Studies of Family Living in the United States and Other countries: An Analysis of Material and Method (No. 223). US Department of Agriculture.

Wolff, E. N. (1998). Recent Trends in the Size Distribution of Household Wealth, Journal of Economic Perspectives, 12(3): 131 – 150.

Yazdan, G. F. & Sina, M. (2013). The Testing of Hall’s Permanent Income Hypothesis: A Case Study of Iran, Asian Economic and Financial Review, 3(3): 311 – 318.

Zeldes S. P. (1989). Consumption and Liquidity Constraints: An Empirical Investigation, The Journal of Political Economy, 97(2): 305 – 334.

How to Cite
Shaikh, S. A., Ismail, M., Ismail, A., Shahimi, S., & Mohd. Shafiai, M. (2018). AN EMPIRICAL INVESTIGATION OF CONSUMPTION BEHAVIOUR IN SELECTED OIC COUNTRIES. Journal of Islamic Monetary Economics and Finance, 4(1), 101 - 116.