Effects of fiscal policy on private investment in Kenya (1964 – 2010)
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Date
2013-08-14
Authors
Njuru, Stephen Gitahi
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Abstract
Private investment in Kenya has been low for the last four decades. This has stimulated much concern to the policy makers‟ bearing in mind that investment is a key variable influencing economic growth. The government of Kenya has over the years designed economic policies with an aim of rejuvenating private investment which was robust during the first decade of independence before deteriorating in the other decades. Fiscal policy has been a major focus towards this direction. The main purpose of this study was to investigate the effects of fiscal policy on private investment in Kenya from 1964 to 2010. The study adopted modified flexible accelerator model to enlighten on the economic relationship between private investment and the other variables. It applied vector auto-regression modeling technique and error correction model to estimate the effects of fiscal policy variables on private investment. The study made use of semi-annual time series data for the period 1964 to 2010. Since some of the variables were stationary at levels while others became stationary at first difference, the study used Johansen cointegration tests to determine long-run relationship between private investment and the aforementioned fiscal variables. Further, the Granger-Causality test was undertaken to determine economic relationship between the variables. The results of the study revealed that fiscal policy design and implementation matters to private investment levels in Kenya. The study found that taxes, government expenditure, government debt servicing and fiscal reforms could either promote or deter private investment both in the short-run and in the long-run. The study concludes that appropriate measures
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ought to be taken while coming up with fiscal policy framework to ensure that as it achieve other objectives of the government, growth of private investment is taken into account