Private Consumption and Government Expenditure in Kenya: Nonlinear Ardl Approach

Abstract

Several studies, both theoretical and empirical, have analyzed the question of whether government expenditure increases or decreases private consumption but the results are inconclusive. The contrasting result is mainly attributed to the use of different methodologies, model specification as well as the diverse economic structures and different government spending patterns in the respective countries. To arrive at appropriate fiscal policy implications, a country-specific study with a sound empirical investigation is necessary. This study adopts the ARDL approach to examine cointegration between private spending and public spending in Kenya for the period 1971-2018 while incorporating disposable income in the model. Furthermore, the study aims to determine asymmetry between the variables by employing the NARDL approach. Results show nonlinearity between private consumption and government expenditure. Also, both models revealed that government expenditure significantly substitutes private consumption whereas household income significantly increases private consumption. The study concludes that government expenditure suppresses private consumption because it is financed by taxes and borrowing which come at the expense of private individuals.