Estimating Consumption Function for Central Asian countries: New Insights

Abstract Consumption is a significant part of the Gross Domestic Product (GDP) that is influenced by income as argued by Keynes and Friedman. This paper empirically estimates the consumption function for four Central Asian economies (Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan) from 1993 to 2020. The empirical results reveal that income has a significant positive effect on consumption in the short and long run. The short-run results support the Keynesian Absolute Income Hypothesis, whereas, the long-run results support Milton Friedman’s Permanent Income Hypothesis. However, the coefficient value is greater than 1 in the case of Uzbekistan which is in contradiction with the consumption function, as Keynes argued that the marginal propensity to consume (MPC) value lies between 0 and 1 (0 < MPC > 1). The key finding of the study is, that in the case of Central Asian countries, the marginal propensity of consumption does not lie in the range proposed by Keynes and does not support the Absolute Income Hypothesis. In this regard, policies are required to increase savings and investment and keep consumption expenditures at optimal levels. These policy measures will contribute more effectively to boosting the economic growth of these economies.