Effect of wealth on household consumption in the Ghanaian economy: using the generalized autoregressive conditioning Heteroscedasticity (Garch) model

Consumption is an unavoidable element or phenomenon that every economy cannot do without it. Consumption has played a crucial role in the building of the human capital as well as the development of a nation. Consumption as in its peculiar state of action has a stronger multiplier effects on the output of a nation with regard to its impact on the economic growth. The paper used a secondary data from Bank of Ghana and World Bank from 1975 to 2008. The data sets is a financial data which envisage all the necessary elements or variables that measures wealth in terms of financial wealth (financial assets) and the household consumption expenditure in the economy. The study adopted an Ordinary Least Squared model to estimate the determinants of consumption. But in the case of the marginal propensity to consume (i.e. elasticity of consumption to wealth and income), the study transformed the Ordinary Least Squared model with a natural log. In order to quantify the wealth effects on consumption, the study followed the approach of Bollerslev and Engels Generalized Autoregressive Conditioning Heteroscedasticity (GARCH) model. The study found out that financial wealth (i.e. as ratio of the money supply to GDP) has a positive impact on household consumption. The study recommended that the government should remove all forms of restriction on the interest rate (i.e. Interest rate ceiling) to attract savings in order to mount up the household endowment for future consumption, which will also in effect make funds available for investment.