Exploring the Dynamic Relationship between Income and Consumption in Central Asia: An ARDL Approach

Abstract

As argued by Keynes and Friedman, consumption is a significant part of the gross domestic product (GDP) and is largely influenced by income levels. This study provides an empirical estimation of the consumption function for four Central Asian economies (Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan) from 1993 to 2020. The results reveal that income exerts a statistically significant influence on consumption in both the short and long term. The short-term results support the Keynesian Absolute Income Hypothesis, while the long-run results are consistent with Milton Friedman’s Permanent Income Hypothesis. However, the study reveals that the marginal propensity to consume in Central Asian countries falls outside the range suggested by Keynes and therefore does not fully validate the Absolute Income Hypothesis. Based on the results, the study recommends policies aimed at enhancing savings and investment, while maintaining consumption at sustainable levels to foster stronger and more stable economic growth in the region.

Keywords:

Consumption Function; Income; Absolute Income Hypothesis; Permanent Income Hypothesis; Panel ARDL; Central Asian Countries