dc.description.abstract |
Macroeconomic stability has been a concern to many economies as it shows the
economic health of a nation. Kenya has had unsustainable and persistent fiscal deficit
which has been phenomenal in the recent past despite several economic reforms being
established in an attempt to stabilizing the economy. The study was informed by the
persistent increase in the budget deficit in Kenya amidst economic stagnation and
macroeconomic instability. This therefore led to an attempt to establish the effect of
selected macroeconomic variables on the budget deficit in Kenya. The specific objectives
were to determine the effect of interest rates; exchange rate; inflation and money supply
on budget deficit in Kenya. The study sought to evaluate the significant effect of the
selected macroeconomic variables on budget deficit in order to formulate the policy
consideration to the economic problem. The study was guided by the Keynesian which
was the main theory of the study. The Mundell-Fleming and Ricardian Equivalence
theories were also employed as addition theories to back up the study. The study
methodology was based on an explanatory design for time series data covering 30 years
from 1991 to 2020. An Autoregressive distributed lag error correction model (ARDL)
estimation was adopted to analyze and infer results of the study. The CUSUM model
stability test indicated that the model was stable and the model coefficient was reliable.
Diagnostic test results showed there was no autocorrelation (p=0.1510>2.062), no
heteroscedasticity (p=0.0903>21.47), and there was no multicollinearity (vif=1.34).
Shapiro wilk normality test indicated that the variables of the study were normally
distributed. The ADF unit root test indicated that there was unit root and co-integration
test confirmed that the variables had a long run relationship. The findings of the study
were: interest rate had a positive significant effect on budget deficit in the long run (
0.0404, p 0 . 016 <0.05); exchange rate had a positive significant effect on budget
deficit (
0.4189, p 0 . 000 <0.05); inflation had a negative insignificant effect on
budget deficit (
-0.001, p 0 . 206 >0.05). Money supply had a positive insignificant
effect on Budget deficit (
0.00004, p 0 . 380 >0.05). The ARDL long-run results
showed that the explanatory variables had Adjusted R 2 =0.4666 impact on the budget
deficit and an F-statistics of 135.5802. The study therefore concluded that interest rate
had a positive effect on the budget deficit in the long run. Increasing interest rates in the
economy ends up driving budget deficit upwards in the long run. The same was true
when the variable of concern is exchange rate. The study findings recommend that there
is need for the government to ensure there is stability in macroeconomic variables. This is
because there was a significant link between the budget deficit and the selected
macroeconomic variables. A strive by the government to reduce budget deficit would
mean an adjustment in macroeconomic variables to suit the purpose. These adjustments
may include reducing the interest rate in the economy. A reduction in the interest rates in
the economy would end up reducing the budget deficit |
en_US |