AGGREGATE CONSUMPTION IN PAKISTAN: Revisiting the Permanent-Income Hypothesis under Adaptive Expectation Model Syed AMMAD* and Qazi Masood AHMED** Abstract This study is an empirical investigation of aggregate consumption function under the permanent- income hypothesis for Pakistan based on Cagan (1956) and Gujarati and Porter (2009) method- ologies. The study employs the annual time series data of real per-capita aggregate consumption and real per-capita income during 1973 to 2015. Results of the study reveal that in short-run a unit increase in per-capita income will increase the per-capita consumption by Rs.0.74 which is the short-run MPC, while the long-run MPC out of income is 0.78. The coefficient of adaptive- expectation term is positive, but insignificant; indicating that previous consumption has no sig- nificant impact on current consumption or there is no significant role of past consumption on the present consumption decisions. The insignificance of adaptive-expectation term rejects the exis- tence of permanent-income hypothesis under adaptive-expectation. Contrary to this, the significant positive effect of per-capita income supports the absolute-income hypothesis in Pakistan. Key words: Aggregate Consumption, Permanent-Income Hypothesis, Adap- tive-expectation, Pakistan. JEL Classification: D12; E12, C22, C5. I. Introduction The understanding of consumer behavior is crucial for macroeconomic stabiliza- tion and development. In general, vast majority of the research work is evolved in search of prime determinants of consumption or more specifically it is related to the consumption function, which exclusively defines the relationship between consump- tion and income. The objective of this research is to find relevance of permanent-in- come hypothesis for Pakistan; under the assumptions of adaptive-expectations model. In order to accomplish this, the study follows Friedman (1957), and Gujarati and Porter (2009) who applied the methodology of adaptive-expectation, devised by Cagan (1956). The study employs the real per-capita gross-national-product (GNP) and real per-capita aggregate consumption during 1973 to 2015. Pakistan Journal of Applied Economics, Vol.28 No.1, (33-46), Summer 2018 * Lecturer/Staff Economist, Applied Economics Research Centre, University of Karachi, ** Director, Centre for Business and Economics Research, Institute of Business Administration, Karachi, Pakistan. This paper is a part of the Ph.D. thesis of the first author.