| Consumption plays a critical role in since it is the largest component at GDP and has a secondary effect on people's saving, future investment and thus growth rate of an economy. Any policy that tends to change consumption will have some implications on the growth of an economy. This explains why it is crucial to investigate the determinants of consumption which are disposable income and interest rate in the traditional consumption function.;In recent history, the majority of literature related to consumption pays close attention to the linkage between consumption and disposable income or interest rate. Estimates of the short-run dynamics are obtained using an error-correction model. The results show significant positive coefficients on disposable income and negative coefficient on interest rates. Policy implication is for domestic government to control consumption in a proper lever through interest rate and disposable income.;However, in 1952, Alexander identified exchange rates as another determinant of consumption. By assuming a long lag of wages behind prices, he argues that when prices rise as a result of devaluation, income might shift from producers, the group with lower marginal propensity to consume, to consumers, the party with higher marginal propensity to consume. Thus, the total expenditure declines. In this dissertation, I introduce exchange rate volatility, another determinant of consumption into consumption function and explore the possibility of cointegration between consumption and uncertainty of exchange rate. As exchange rate is a factor to influence consumption, it makes sense to believe that uncertainty of exchange rate will also affect consumption. By including volatility of exchange rate which is measured by GARCH model in the consumption function and by applying the ARDL bounds testing procedure, we work on the annual data of 17 countries among which 10 countries show that there is long-run effect of exchange rate volatility on aggregate consumption. |
