Non-Linear Effect of Government Spending on Private Consumption in Cambodia: Markov-Switching Autoregressive Model

The influence of government expenditure on private consumption has been debated among scholars. Some studies have found a positive linkage between the two while some others have found a negative one. In this study, the Markov-Switching Autoregressive (MSAR) model was used to investigate the non-linear impact of government spending on private consumption in Cambodia. The result based on Cambodia's annual data from 1987 to 2015 shows that private consumption responds positively to a rise in disposable income or a decline in saving interest rates. Inflation is statistically insignificant. The impact of government purchases on private consumption is linear, negative, and asymmetric. A non-linear effect of government investment on household consumption occurs in Cambodia during certain periods—times of political instability, which are 1994-1995, 1997-1998, and 2004-2006. This non-Keynesian effect during the period 2010-2015 occurs because of raising the present value of taxes. The contribution of the study is that an increase in the present value of taxes and political instability can prevent the efficacy of government spending on private consumption.