Full research (Hebrew)

​Watch Arnon Barak, an economist at the reserch depratment, describes the main findings. 

·      The study, which distinguishes between the short-term and long-term effects of private consumption, finds that the level of private consumption in the long term is determined mainly by income from labor and the financial assets held by households, and that the value of homes and the state of the global economy, as reflected in the volume of world trade, are also important.

·     In the short term, volatility in private consumption is mainly the result of changes in the value of financial assets, while changes in current income has an effect mainly through income from transfer payments.  In addition, there is no evidence that changes in the security situation have an effect on consumption.  The interest rate has a direct effect after one year (although not within one quarter).


Private consumption is the largest component of domestic product, and in the past 20 years, its proportion of GDP has ranged around 55–60 percent.  Moreover, in the past three years, private consumption has grown rapidly, and is the leading factor in GDP growth. Therefore, private consumption is an important factor in forecasts and macroeconomic analyses.


A study conducted by Arnon Barak of the Bank of Israel Research Department has tried to identify and quantify the factors that affect private consumption in Israel.


The study estimated the private consumption function in Israel between 1995 and 2015 through a standard error-correction model, while using quarterly data through which the short-term effects can be identified.


The results of the estimation show that in the long term, consumption by households is determined by permanent income from labor, while temporary changes in income do not lead to changes in consumption.  An exception in this regard is income from transfer payments, since that is translated for the most part into consumption in the immediate term.  The reason for this is that transfer payments are focused on population groups with relatively low income levels, which suffer more from liquidity limitations.


In addition, the findings show that there is a ‘wealth effect”, which means that private consumption is also affected by the assets held by households.  The wealth effect of the value of dwellings is lower than that of financial assets, due to the fact that real assets are less liquid and more difficult to realize than financial assets.


World trade also has an effect on private consumption in Israel.  An increase in world trade reflects an improvement in the economic environment of households in Israel.  While most of the public does not keep track of developments in world trade itself, it is, apparently, indirectly influenced by this index through forecasts and analyses by various entities and their publication through the press.


The interest rate is another factor that affects changes in private consumption in the relatively short term.  According to the results of the study, a decline in the interest rate leads households to slightly increase current consumption at the expense of consumption in a year (although there is no change in consumption within one quarter).


The results of the estimation provide no evidence that a change in the security situation leads to a change in private consumption.  This result is surprising, because it runs counter to intuition, which posits that a bad security situation deters households from going to shopping areas, thereby impacting private consumption.  However, there are a number of possible explanations for this finding.  One is that when the security situation worsens private consumption declines in the immediate term, but then compensates for the decline within the same quarter, such that over all, there is no negative impact to consumption as reflected in the quarterly National Accounts data.  However, this is only a partial explanation, because it is not always possible to replace what was not consumed at that time (for instance, a vacation that was cancelled).  There may be complementary explanations such as special discounts and sales promotions by businesses, particularly hotels and guest houses, making some purchases over the Internet rather than in person, and war-time consumption, which is reflected for instance in increased consumption of food, clothing and hygiene products that households purchase for security forces.  The results of the estimation show that these effects may offset the negative effects of wars and terrorism on consumption.


Table 1: Coefficients of the main variables in the private consumption function

(The data reflect elasticity, meaning the rate of change in private consumption as a result of a one percent change in the variable)





Income from labor


Not significantly different from zero

Transfer payments

Not significantly different from zero


Financial assets



Value of dwellings


0.1 (borderline significant)

World trade