Household Consumption, Domestic Investment, Government Expenditure and Economic Growth: New Evidence from Malaysia

Abstract

This paper examines the dynamic linkages between economic growth, household consumption, domestic investment and public expenditure in Malaysia by adopting ARDL approach for the period of 1960-2010 based on Keynesian and Wagner’s law hypothesis. We have also created two dummies variables in the model to capture two major economic crises: Asian Financial Crisis 1997-1998 and Global Financial Crisis 2008-2009. The empirical result showed that there is a long run relationship exists in the model proposed. Mixed evidence is found for the short run and the variables are mostly significant for the long run elasticity. The contribution of consumption is said to be the largest followed by gross domestic investment and public expenditure. The empirical findings showed that the policies employed by the government are currently effective and help to promote growth in the long run. Moreover, the policies are also capable in sustaining the economy during recession period. The findings help to give clear pictures for the policymaker to construct suitable policies that can accelerate higher economic growth for Malaysia and achieving the target of high income country in the year 2020.