Monetary policy, fiscal policy and economic growth stimulation in kenya

Abstract

ABSTRACT Increased economic growth is a key objective that the Kenyan government strives to achieve in order to reap its welfare benefits. To achieve this, the government of Kenya incorporated the economic pillar in its Vision 2030 which aimed at realizing an annual economic growth rate of 10% by the year 2030. To date, this rate is yet to be achieved and the current economic growth of Kenya remains far below it. Prompted by this, this study set out to investigate whether fiscal and monetary strategies influence Kenyan economic growth and consequently determine which policy is more effective between the two in stimulating the growth of output in Kenya. To achieve the specified objectives, the study used a causal research design to train a Structural Vector Autoregressive model of order three (SVAR (3)) with time series data collected from the first quarter of 2006 through the fourth quarter of 2019.To ensure the model results were robust and reliable, a series of residual diagnostic tests including stationarity, normality, Granger causality, model stability and autocorrelation were performed. The diagnostic results showed that the estimated model was sound and robust for making inferences. The study findings revealed that both strategies had substantial stimulative influence on Kenya’s economic growth rate. Specifically, considering the effect of fiscal plan on Kenya’s economic growth rate, the analysis revealed that positive shocks on tax revenue decreased economic growth significantly for two quarters while a positive shock on debt increased economic growth significantly for two quarters after which the impact decayed to zero. A positive shock on government expenditure was observed to produce inconsequential influence on output growth. Turning to monetary policy, the study found that a positive innovation on the central bank rate and the nominal effective exchange rate, decreased growth significantly for three quarters after which the effect becomes positive and their impact dies overtime. On the other hand, an observation of insignificant effect on growth stimulation was noted when a positive innovation on money supply was introduced. Guided by the results of the comparative analysis on which policy was more potent than the other, fiscal strategy was noted to be more stimulative relative to the monetary policy. As such, this study advocates for the application of expansionary fiscal measures to spur growth in Kenya.