The Moderating Effect of Inflation on the Relationship between Foreign Direct Investment, Financial Market Development and Economic Growth in Kenya.
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Date
2020
Authors
Odidi, Mercy Vera
Jagong’o, Ambrose
Journal Title
Journal ISSN
Volume Title
Publisher
International Academic Journals
Abstract
A great deal of literature from a number of
studies established that stable financial
system offers risk diversification and
efficient capital allocation that leads to
economic growth of a country and also the
economic expansions caused by harnessing
FDI as a source of external financing equally
leads to economic growth. However, finance
literature records that moderate and low rate
of inflation positively affects growth of the
economy but high and accelerating rate of
inflation jeopardize growth within the
economy. This study therefore seeks to
determine the moderation effect of inflation
on these relationships in the Kenyan set up.
This study aims at establishing the
moderating effect of inflation on the
relationship between foreign direct
investment, financial market development
and economic growth in Kenya. Economic
growth will be the dependent variable while
FDI and financial market development are
the independent variables. The study
incorporated a macroeconomic variable
(inflation rate) to moderate between the
dependent and independent variable. The
study anchored on Financial Intermediation
Theory and the Eclectic Paradigm Theory.
Secondary data collected for analysis from
KNBS economic surveys, World Bank
reports, central bank of Kenya’s reports,
economic journals and annual economic
survey reports for a period of 36 years 1980
to 2016. Data analysis carried out using SPSS
implementing descriptive and inferential
statistics; the study findings revealed that the
linear financial market development and
foreign direct investment have positive effect
on economic growth in Kenya. However, the
interaction term between financial
development and inflation rate has a negative
on economic growth. The marginal effect of
FDI evaluated on inflation rate resulted to a
positive interaction term. In conclusion, the
explanatory effect (adjusted R squared)
increased signifying the presence of the
moderating effect. Therefore, the study
concluded that inflation moderates the
relationship between FDI, financial market
development and economic growth in Kenya.
The study recommended development of
policies to attract FDI in Kenya at moderate
levels of inflation to result into a long-term
benefit growth within the economy. In
addition, to develop financial markets within
a reduced level of inflation within the
economy to enable achievement of long run
economic benefit. Further research should be
carried on the moderating effect of other
macroeconomic variables on the FDI growth
nexus and financial market development and
economic growth relationship.
Description
A research article published in International Academic Journal of Economics and Finance
Keywords
moderating effect, inflation, foreign direct investment, financial market development, economic growth, Kenya
Citation
Odidi, M. V. & Jagong’o, A. (2020). The moderating effect of inflation on the relationship between foreign direct investment, financial market development and economic growth in Kenya. International Academic Journal of Economics and Finance, 3(6), 168-180