Implications of fiscal policy on household consumption in Kenya: A nonlinear auto-regressive distributed lag approach

Abstract

Orientation: Fiscal policy can be applied with a stabilisation intention if government finance choices can influence household consumption behaviour. According to Keynes, expansionary fiscal policy is the best economic stabilisation tool. Research purpose: This article examined the crowding in effects of fiscal policy on household consumption whilst investigating the effectiveness of fiscal policy in Kenya. Motivation for the study: Household consumption is a key indicator of economic well-being in any economy. Despite its importance, empirical studies examining the relationship between fiscal policy and household consumption are limited in Kenya. In addition, empirical studies on this subject focused on the linear or the symmetric effects of fiscal policy on household consumption. Objective: The objective of this study was to investigate the asymmetric effects of fiscal policy on household consumption in Kenya. Methodology: This study employed a quantitative research method using time series data which ranged from 1971 to 2018. The nonlinear auto-regressive distributed lag (NARDL) model was used in the empirical analysis. Results: In the short run, fiscal policy was found not to affect household consumption. However, fiscal policy was found to have asymmetric effects on household consumption in the long run. The managerial implications: The study revealed that, in the long run, negative changes in tax revenue crowd in consumption whilst other factors do not have a significant effect on household consumption. Value-added: This study informs the Kenyan government on the best way to follow when fiscal policy tools must be employed to boost household consumption.

Keywords

• fiscal policy
• household consumption
• government consumption expenditure
• tax revenue