Nexus between inflation and economic growth in Kenya
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Date
2025-02
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Kenyatta University
Abstract
The objective of Kenya's Vision 2030 is to attain and maintain an annual average economic growth rate of 10%. A steady and predictable macroeconomic climate is necessary for growth, investment, and development. The main categories of commodities and services that drive inflation in Kenya include food and non-food products. A deeper understanding of the intricate link between inflation and economic growth in Kenya is necessary to determine the appropriate economic policies that both preserve stable prices for goods and services and foster sustainable economic growth and development. The major goal of the study was to ascertain the connection between inflation and GDP growth in Kenya by establishing the relationship between the category of inflation that is unrelated to food and examining the impact of food inflation on economic growth. The study is premised on the Cobb-Douglas production function and the Solow growth model. Non-experimental research methodology together with time series data from the Kenya National Bureau of Statistics, Central Bank of Kenya, World Bank and other international organizations’ databases covering the years 1980–2023 were used in the study. Before analysis, the variables were subjected to various diagnostic tests, such as residual testing, co-integration, correlation analysis, and stationarity tests. The study revealed that neither nonfood inflation nor economic growth granger-causes each other whereas food inflation has a significant negative effect on economic growth. The study recommends that the government of Kenya through monetary policy authority should enact policies that are anti-inflationary by holding money circulating in the economy to check on inflation that sustains favorable economic growth in the country. Further, the government should also enact fiscal policies that control excessive taxation to avoid increase in the costs of food items which affects the levels of consumption, savings and investment necessary for economic growth.
Description
A research project submitted to the department of applied Economics in the school of business, economics and tourism in Partial fulfillment of the requirements for the award of Master of economics (cooperation & human development) of Kenyatta University, February 2025
Supervisor:
Dr. James Maingi