Intertemporal consumption behaviour in OIC countries

Abstract

Purpose

This study aims to examine the consumption behaviour in Organization of Islamic Cooperation countries.

Design/methodology/approach

Using time series and panel data, this study estimates rational expectations permanent income hypothesis model and the intertemporal elasticity of substitution, and examines the response in consumption to expected and unexpected changes in income.

Findings

The evidence supports the phenomenon of loss aversion. The response of consumption to unexpected income changes is statistically significant in only one-third of the countries in the sample. Conversely, the response of consumption to expected income changes is statistically as well as economically significant in one-fourth of the countries in the sample. The intertemporal elasticity of substitution is also statistically insignificant in majority of OIC countries in the sample.

Practical implications

The evidence in support of loss aversion in preferences could help in explaining the low penetration of equity-based risk sharing instruments in Islamic finance.

Social implications

The excess sensitivity of consumption to income suggests that redistribution efforts to enhance incomes of poor households could help in enhancing their consumption levels.

Originality/value

The study takes a comprehensive sample across time and space for OIC countries as compared to previous studies and also adjusts the budget constraint for Zakat.

Citation

Shaikh, S.A., Ismail, M.A., Ismail, A.G., Shahimi, S. and Mohd Shafiai, M.H. (2018), "Intertemporal consumption behaviour in OIC countries", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 11 No. 4, pp. 529-552. https://doi.org/10.1108/IMEFM-06-2017-0160