Selected macroeconomic variables dynamics and economic growth nexus in Kenya

Abstract

The government through monetary and fiscal policies has tried to target selected macroeconomic factors to trigger economic growth in Kenya. Despite these measures, Kenya’s GDP performance is constrained by high level of inflation, fiscal deficits, interest rates, and fluctuating exchange rates. Consequently, the economy has is characterized by sluggish cycles of low economic growth with policymakers revising their policies. Potential increase in economic growth level is central for Kenya to address macroeconomic instability. Supplementary evidence available indicates divergent views on the relationship between selected macroeconomic variables and economic growth. This study sought to determine the effect of selected macroeconomic variables dynamics on economic growth and the moderating effect of political instability on the relationship in Kenya. Specific objectives of the study were to establish the effects of; fiscal deficit, exchange rate, inflation, broad money supply, interest rate, ICT on economic growth in Kenya and to investigate the moderating effect of political instability on selected macroeconomic variables dynamics and economic growth nexus. The study was anchored on Endogenous and Solow’s growth theories. Grounded in the philosophical paradigm of positivism, the study adopted an explanatory research design and relied on secondary data from the Kenya Bureau of statistics and International Country Risk Guide with the data spanning from 1990 to 2020. The study employed bound test to test for long run relationship and Autoregressive Distributed Lag model (ARDL) in the empirical analysis to evaluate the relationship among the variables. The data was subjected to stationarity test using Augmented Dickey Fuller (ADF) test, Kwiatkowski–Phillips–Schmidt–Shin (KPSS) and Phillips and Perron (PP) for unit root test. Clemente-Montañés-Reyes unit root was conducted to establish presence of structural breaks. The long run ARDL for testing the hypotheses established that the coefficients of; exchange rate, inflation,broad money supply and lending interest rate significantly affected economic growth but ICT and fiscal deficit were insignificant in the long run. Political instability moderated the relationship between exchange rates with (, inflation (, money supply), lending interest rates (, and ICT (. The study contributes new insights to policymakers by revealing that political instability moderates the relationship between selected macroeconomic variables and economic growth. Therefore, the study submits that the government should work to strengthen political stability by gradually establishing institutions that uphold the rule of law and provide security. Further, the findings of this study will inform the government on ways of finding possible solutions to the low economic growth; it will be useful in fiscal and monetary policy formulation. The study recommends that policymakers in CBK ought to adopt policies that maintain and keep stability in exchange rate, control of inflation, regulate and determine effective lending interest rates, finally the government should invest in the ICT sector to improve its accessibility and affordability.