Is the consumption-income ratio stationary in African countries? Evidence from new time series tests that allow for structural breaks

ABSTRACT

This article examines whether the consumption-income ratio is stationary in 50 African countries. We use the residual augmented least squares (RALS-LM) unit root test that allows for structural breaks. The empirical evidence shows that the consumption income ratio is stationary around structural breaks in most (44 out of 50) African countries. This is consistent with the predictions of most economic theories. The general finding of mean reversion implies that (policy) shocks are likely to have only temporary effects on the consumption-income ratio in most African countries .

KEYWORDS:

• Consumption-income ratio
• African countries
• unit root tests
• structural breaks

JEL CLASSIFICATION:

• C22
• E12
• E21

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Cerrato, De Peretti, and Stewart (2013) note that shifts in a range of factors (demographic factors, wealth, inflation, interest rates, income growth, income uncertainty, liquidity constraints and fiscal variables, etc.) can cause the APC to shift, giving rise to structural breaks.

² The countries that we consider are Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cape Verde, Cameroon, Central African Republic, Chad, Comoros, Congo, Cote D’Ivoire, Democratic Republic of the Congo, Djibouti, Egypt, Equatorial Guinea, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Libya, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, Swaziland, Tanzania, Togo, Tunisia, Uganda, Zambia, Zimbabwe.

³ The data for Tanzanian are only for the mainland of the country as the dataset for Zanzibar is not available. We have excluded Ethiopia, which is one of the largest countries in the continent, due to a lack of consistent data availability.

⁴ ‘It should be noted that exogenously determined breaks relies on more restrictive assumption because they assume that the break dates are known beforehand’.

⁵ Unreported results (available from the authors upon request) from the application of ADF, LM, and RALS-LM tests without breaks to all countries’ LAPCs indicate rejection of the unit null in 35 countries according to the ADF test and 10 countries using the no-break LM and RALS-LM tests.