Application of the theory of consumption function in the Czech Republic

The bachelor thesis deals with the topic of household consumption in the Czech Republic over the last roughly 20 years. The aim is to confirm the hypothesis, that MPC lies close to 1, and then to verify Keynes’s assumption that an increase in the disposable income leads to a decrease in the APC, i.e. that the development corresponds to Keynes’s concept of the consumption function. Testing of the hypothesis was performed on annual data from the Czech Statistical Office using the OLS method. A model including the total household consumption did not prove the validity of the Keynes theory due to the low estimate of MPC and ambiguous development of APC. Excluding mid-term and long-term consumption from the model resulted in fall of the MPC estimate from 0.54 to 0.44, which is inconsistent with the Keynes’s predictions about MPC lying significantly closer to 1. Although the APC’s development in this model already corresponds with the Keynes’s assumptions, from the general point of view, household consumption in Czech does not fulfill the attributes of the Keynesian consumption function, so that the initial hypothesis was rejected. Further tests shows that household consumption is determined not only by the current disposable income but also by the level of consumption in the previous year.