Household Consumption of Durable Goods: A Two-Stage Budgeting Framework at Different Levels of Inflation in Pakistan

Abstract

In recent times, Pakistan has been facing increasingly higher rates of inflation due to economic instability and domestic uncertainty. Since the entire economy is made of individual households, understanding household consumption behavior is important for evidence based policy interventions in Pakistan. The purpose of this study is to understand how households in Pakistan alter their overall consumption behavior and, specifically, durable consumption spending based on the prevailing inflation rates. For this purpose, Household Integrated Economic Survey (HIES) data from three rounds, 2010-11, 2015-16, and 2018-19, was pooled, budget shares were calculated, and Quadratic Almost Ideal Demand Systems (QUAIDS) at two stages of budgeting were estimated. The results showed that over time, expenditure shares on food have decreased while they have increased on nondurables indicating an improving standard of living in Pakistan. Durable goods are the only commodity group significantly affected by inflation, however, the effect is negative. A higher rate of inflation seems to be associated with a lower budget share of durables. The demand elasticities of the first stage of budgeting showed that food is a necessity, while nondurable goods and durable goods are both luxuries with elasticities greater than 1. Cross-price elasticities showed that food and nondurables are asymmetric complements and substitutes. In the second stage of budgeting, the demand elasticities indicated that all three subgroups of durables are unitary elastic indicating that all three subgroups are equally important. Cross-price elasticities showed that Kitchenware and Electronics are complements, while Furniture is a substitute for Electronics.