Katie Dack and Aleksandar Vasilev
University of Lincoln, UK

Part of the book: Advances in Business and Management. Volume 20

Chapter DOI: https://doi.org/10.52305/NJVS2286

Abstract

The aim of this study is to model the effects of interest rates on consumption within the UK economy to allow for a clearer understanding of the relationship between these two variables at hand and how this relates to the current economic literature. This paper also explores the causal effects of other independent variables on consumption and whether they have a significant impact or not. This topic is addressed by using a range of economic models, using Stata and EViews, to explore the full relationship of the variables at hand and how they impact consumption. This paper provides an understanding of the timing and the effectiveness of changes in the interest rate that influences consumption. A greater understanding of the relationship between these two variables can be very important to the use of the monetary policy that the UK government uses within their economy.

Keywords: consumption, interest rates, macroeconomics, time-series

References

Advani, A., Bangham, G. and Leslie, J. (2021) The UK’s wealth distribution and
characteristics of high‐wealth households. Fiscal Studies, 42(3-4) 397–430. Available
from [accessed 4 November 2021].
Angus Deaton and Oxford University Press (2009) Understanding consumption. Oxford Etc.: Clarendon Press.
Blanchard, O., Fischer, S., Campbell, J. and Mankiw, N. (1989) Chapter Title:
Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence.
NBER Macroeconomics Annual 1989, Volume 4, 4(SBN: 0-262-02296-6) 0–262.
Available from https://www.nber.org/system/files/chapters/c10965/c10965.pdf
[accessed 10 March 2022].
Consumption Function: Concept, Keynes’s Theory and Important Features (2014)
Available from https://www.yourarticlelibrary.com/economics/consumption-function/consumption-function-concept-keyness-theory-and-important-features/37745
[accessed 9 March 2022].
d.o.o, G. (n.d.) May 2015 Available from http://www.efzg.unizg.hr/default.aspx?id=22437
[accessed 9 March 2022].
Elmendorf, D.W., Dennis, B., Dynan, K., Gale, B., Manchester, J., Mankiw, G., Page, B.
and Randolph, B. (1996) The Effect of Interest-Rate Changes on Household Saving
and Consumption: A Survey.
Fikizolo, S. (2020) The Asymmetric Effects of Interest Rate Changes on Household
Consumption: A Case For South Africa How household consumption reacts to
changes in the interest rate. Dissertation presented as the partial requirement for
obtaining a Master’s degree in Statistics and Information Management.
Frost, J. (2019) 7 Classical Assumptions of Ordinary Least Squares (OLS) Linear
Regression – Statistics By Jim Available from https://statisticsbyjim.com/regression/ols-linear-regression-assumptions/
[accessed 9 March 2022].
GDP per capita in England (n.d.) Available from https://ourworldindata.org/grapher/gdp per-capita-in-the-uk-since-1270?time=1831..2016 [accessed 3 April 2022].
Gross National Income: Current price: Seasonally adjusted £m – Office for National
Statistics (2022) Available from https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/abmz/ukea
[accessed 4 April 2022].
Hansen, H.-J. (1996) The Impact of Interest Rates on Private Consumption in Germany.
SSRN Electronic Journal, Available from https://www.econstor.eu/bitstream/10419/107157/1/780686640.pdf
[accessed 10 March 2022].
HM Revenue & Customs (2014) Rates of Income Tax Available from
https://www.gov.uk/government/statistics/rates-of-income-statistics [accessed 4 April 2022].
House Price Index: annual tables 20 to 39 – Office for National Statistics (2022) Available from
https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/housepriceindexannualtables2039
[accessed 4 April 2022].
Household Final Consumption Expenditure: Durable goods: Annual growth rate %:
Chained Volume Measures: Seasonally Adjusted – Office for National Statistics (2022)
Available from https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/khc3/ukea
[accessed 4 April 2022]. Implied GDP deflator at market prices: SA Index – Office for National Statistics (2022)
Available from https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/l8gg/qna
[accessed 4 April 2022]. Inflation, consumer prices (annual %) – United Kingdom | Data (2022) Available from
https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=GB [accessed 4 April 2020].
Jahan, S., Saber Mahmud, A. and Papageorgiou, C. (2014) What Is Keynesian Economics?
– Back to Basics – Finance & Development, September 2014 Available from
https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm
[accessed 10 March 2022]. LPMVWLM | Bank of England | Database (n.d.) Available from
https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.aspTravel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=LPMVWLM&UsingCodes=Y&Filter=N&title=LPMVWLM&VPD=Y 
[accessed 4 April 2022]. Mankiw, G. (2019) New Keynesian Economics – Econlib Available from
https://www.econlib.org/library/Enc/NewKeynesianEconomics.html [accessed 10 March 2022].
Non-durable goods: Total CP SA £m – Office for National Statistics (2022) Available from
https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/timeseries/utij/pn2
[accessed 4 April 2022]. OECD (2019) Interest rates – Long-term interest rates – OECD Data Available from
https://data.oecd.org/interest/long-term-interest-rates.htm [accessed 4 April 2022].
ONS (2022a) Gross Domestic Product: Chained Volume Measures: Seasonally Adjusted
£m – Office for National Statistics Available from
https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/abmi/qna [accessed 4 April 2022].
ONS (2022b) Unemployment Rate (aged 16 and over, Seasonally adjusted) – Office for National Statistics Available from
https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms
[accessed 4 April 2022].
Real interest rate (%) – United Kingdom | Data (2014) Available from
https://data.worldbank.org/indicator/FR.INR.RINR?locations=GB [accessed 4 April 2022].
Sousa, R. M. (2009) Wealth Effects on Consumption – Evidence from the Euro Area. SSRN
Electronic Journal.
The World Bank (2019) Population, total – United Kingdom | Data Available from
https://data.worldbank.org/indicator/SP.POP.TOTL?locations=GB [accessed 4 April 2022].
Total Wealth: Wealth in Great Britain – Office for National Statistics(2022) Available from
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/totalwealthwealthingreatbritain [accessed 4 April 2022].
UK House Price Index (2018) Available from https://landregistry.data.gov.uk/app/ukhpi/browse?from=1966-01-01&location=http%3A%2F%2Flandregistry.data.gov.uk%2Fid%2Fregion%2Funited-kingdom&to=2018-04-01&lang=en
[accessed 4 April 2022].
UK: Total Final Consumption Expenditure: CP NSA – Office for National Statistics (2022)
Available from https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/abkw/ukea
[accessed 4 April 2022].
Vasilev, A. (n.d.) A Service of zbw Leibniz-Informationszentrum Wirtschaft Leibniz
Information Centre for Economics Consumption Modeling: Country studies on
Sweden, Denmark and Japan.
Webber, D. and Mann, O. (2020) Average household income, UK – Office for National
Statistics Available from https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2020provisional [accessed 4 April 2022]