CONSUMPTION FUNCTION IN THE WESTERN BALKANS COUNTRIES

In this paper relationship between consumption and income is examined in the Western Balkans countries in period 2005-2014. The relationship is explored in form of the Keynesian consumption function structured as a simple regression equation in which variations in consumption are explained by changes in income. Parameters obtained from the regression equation have signs in accordance with the standard economic theory. GDP (used as a proxy for income) has a positive and significant impact on private household consumption. The Hausman and the Breusch-Pagan Lagrangian test are also done in order to decide between usage of random or fixed effect techniques, and after that between random effect and ordinary least square techniques. Marginal propensity to consume appears to be less than average propensity to consume (APC) implying a decrease in APC through time. Consumption expenditures of this group of countries conform to models based on the Keynesian consumption function. Household consumption expenditures are estimated for period 2015-2017 by usage of the World Bank projections and the resulting figures predict an increase in consumption. Policy recommendation from the model used in this paper is that economic growth could  be boosted by reducing the factors that influence consumption such as taxes.