The current study examines the association amongst fiscal policy and macroeconomic variables using a Vector Autoregression (VAR) approach. The researcher aims to examine the dynamic paraphernalia of fiscal policy shocks on real GDP growth and interest rates, as well as to provide insights into the transmission mechanisms and policy implications. The analysis is based on a comprehensive dataset comprising key fiscal policy indicators, tax revenue, government expenditure, real interest rates, and real GDP growth for Kenya from 1998 to 2023. The VAR model is estimated, and robustness of results was assessed through various tests. The findings reveal that increases in government expenditure and tax revenue positively impact economic growth, while fiscal policy variables also influence interest rate dynamics. These results have important implications for policymakers in designing effective fiscal and monetary policies to stimulate economic growth and maintain financial stability. The current research contributes to the existing literature on fiscal policy and macroeconomic dynamics and suggests potential avenues for future research.
Abram, S., Atkins, E., Dietzel, A., Jenkins, K., Kiamba, L., Kirshner, J. et al. (2022). Just Transition: A Whole-Systems Approach to Decarbonisation. Climate Policy, 22, 1033-1049. https://doi.org/10.1080/14693062.2022.2108365
Addai, M., Odame-Amoah, E., Felicia, O. U., Bentsiwaa, E. B. A., & Blessing, E. C. (2022). The Role of Fiscal Policy in the Development of the Ghanaian Economy. Open Journal of Business and Management, 10, 778-788. https://doi.org/10.4236/ojbm.2022.102043
Afonso, A., & Jalles, J. T. (2019). Revisiting Fiscal Sustainability: Panel Cointegration and Structural Breaks in OECD Countries. Journal of Economic Dynamics and Control, 99, 117-141.
Agénor, P. R., & Montiel, P. J. (2008). Development Macroeconomics. Princeton University Press.
Aizenman, J., & Jinjarak, Y. (2012). Debt Overhangs: Past and Present. Journal of International Economics, 87, 227-233.
Aizenman, J., Jinjarak, Y., & Park, D. (2013). Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990-2010. Open Economies Review, 24, 371-396. https://doi.org/10.1007/s11079-012-9247-3
Alesina, A., & Perotti, R. (1997). Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects. IMF Staff Papers, 44, 210-248.
Batini, N., Eyraud, L., & Forni, L. (2011). Fiscal Consolidation: How Much, How Fast, and by What Means? IMF Staff Discussion Note No. 11/10. International Monetary Fund.
Batini, N., Eyraud, L., Forni, L., & Weber, A. (2014). Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections. International Monetary Fund. https://doi.org/10.5089/9781498382458.005
Berg, A., Ostry, J. D., Caballero, R. J., & Krishnamurthy, A. (2004). Fiscal Policy and Financial Depth. NBER Working Paper No. 10532. National Bureau of Economic Research.
Bernoth, K., von Hagen, J., & Schuknecht, L. (2012). Sovereign Risk Premiums in the European Government Bond Market. Journal of International Money and Finance, 31, 975-995. https://doi.org/10.1016/j.jimonfin.2011.12.006
Blanchard, O., & Perotti, R. (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. The Quarterly Journal of Economics, 117, 1329-1368. https://doi.org/10.1162/003355302320935043
Bova, M. E., Carcenac, N., & Guerguil, M. M. (2014). Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World. International Monetary Fund. https://doi.org/10.2139/ssrn.2480271
Calderón, C., Fuentes, J. R., & Villarreal, R. (2016). Assessing the Impact of Fiscal Policy on Inequality in Latin America. World Development, 78, 386-396.
Cerra, V., & Saxena, S. C. (2008). Growth Dynamics: The Myth of Economic Recovery. American Economic Review, 98, 439-457. https://doi.org/10.1257/aer.98.1.439
Cevik, E. I., & Sahin, S. (2020). Fiscal Multipliers across the Income Distribution and the Balance Sheet Channel. Journal of Macroeconomics, 65, Article ID: 103219.
Checherita-Westphal, C., & Rother, P. (2010). The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area. European Economic Review, 54, 353-374.
Chuku, C. A. (2017). Fiscal Policy Shocks and Stock Market Performance in Emerging Market Economies. International Review of Financial Analysis, 52, 190-201.
Claessens, S., Kose, M. A., & Terrones, M. E. (2012). How Do Business and Financial Cycles Interact? Journal of International Economics, 87, 178-190. https://doi.org/10.1016/j.jinteco.2011.11.008
Corsetti, G., Kuester, K., & Müller, G. J. (2013). Sovereign Risk, Fiscal Policy, and Macroeconomic Stability. Economic Journal, 123, F99-F132. https://doi.org/10.1111/ecoj.12013
Cuestas, J. C., & Garratt, A. (2018). Fiscal Shocks and Budget Balance Persistence in the EU Countries from Central and Eastern Europe. Economic Modelling, 72, 8-22.
Cunningham, W., Sanchez-Puerta, M. L., & Wuermli, A. (2010). Active Labor Market Programs for Youth: A Framework to Guide Youth Employment Interventions. World Bank Employment Policy Primer.
Dutt, A. K. (2013). Government Spending, Aggregate Demand, and Economic Growth. Review of Keynesian Economics, 1, 105-119. https://doi.org/10.4337/roke.2013.01.06
Eggertsson, G. B., & Krugman, P. (2012). Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach. The Quarterly Journal of Economics, 127, 1469-1513. https://doi.org/10.1093/qje/qjs023
Evans, P. (2019). Fiscal Policy and Economic Growth in Developing Countries: Evidence from Sub-Saharan Africa. Research in International Business and Finance, 48, 453-465.
Fatás, A., & Mihov, I. (2009). The Macroeconomic Effects of Fiscal Rules in the US States. Journal of Public Economics, 93, 1048-1067.
Fatás, A., & Summers, L. H. (2018). The Permanent Effects of Fiscal Consolidations. Journal of International Economics, 112, 238-250. https://doi.org/10.1016/j.jinteco.2017.11.007
Fratzscher, M. (2012). Capital Flows, Push versus Pull Factors and the Global Financial Crisis. Journal of International Economics, 88, 341-356. https://doi.org/10.1016/j.jinteco.2012.05.003
Furceri, D., & Zdzienicka, A. (2015). The Real Effect of Financial Crises in the European Transition Economies. Journal of Banking & Finance, 52, 273-292.
Gachari, J. M., & Korir, J. K. (2020). Effect of Fiscal Policy on Unemployment in Kenya. Journal of Economics and Finance, 11, 19-31.
Gali, J., López-Salido, J. D., & Vallés, J. (2007). Understanding the Effects of Government Spending on Consumption. Journal of the European Economic Association, 5, 227-270. https://doi.org/10.1162/JEEA.2007.5.1.227
Ghosh, A. R., Kim, J. I., Mendoza, E. G., Ostry, J. D., & Qureshi, M. S. (2013). Fiscal Fatigue, Fiscal Space, and Debt Sustainability in Advanced Economies. Economic Policy, 28, 365-402.
Gupta, H. (2014). Public Expenditure and Economic Growth.
Hamilton, J. D. (1994). Time Series Analysis. Princeton University Press. https://doi.org/10.1515/9780691218632
Ilzetzki, E., Mendoza, E. G., & Vegh, C. A. (2013). How Big (Small?) Are Fiscal Multipliers? Journal of Monetary Economics, 60, 239-254. https://doi.org/10.1016/j.jmoneco.2012.10.011
Karagöz, K., & Keskin, R. (2016). Impact of Fiscal Policy on the Macroeconomic Aggregates in Turkey: Evidence from BVAR Model. Procedia Economics and Finance, 38, 408-420. https://doi.org/10.1016/S2212-5671(16)30212-X
Keller, J., Mboya, B. O., Sinclair, J., Githua, O. W., Mulinge, M., Bergholz, L. et al. (2017). A 6-Week School Curriculum Improves Boys’ Attitudes and Behaviors Related to Gender-Based Violence in Kenya. Journal of Interpersonal Violence, 32, 535-557. https://doi.org/10.1177/0886260515586367
Kiamba, J., Kariuki, G., & Makau, S. (2020). Public Debt and Economic Growth in Kenya. African Journal of Economic Review, 8, 78-94.
Kimenyi, M., & Ndung’u, N. (2009). Expanding the Financial Services Frontier: Lessons from Mobile Phone Banking in Kenya. Brookings Institution.
Kirui, R., & Onyuma, S. (2019). Effect of Group Composition and Formalization on Financial Performance of Investment Groups in Kenya. International Journal of Economics, Finance and Management Sciences, 7, 65-73. https://doi.org/10.11648/j.ijefm.20190702.13
Lane, P. R., & Perotti, R. (2003). The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes. Journal of Public Economics, 87, 2253-2279. https://doi.org/10.1016/S0047-2727(01)00194-3
Leeper, E. M., Walker, T. B., & Yang, S. C. (2009). Government Investment and Fiscal Stimulus in the Short and Long Runs. Journal of Monetary Economics, 56, 931-950.
Mankiw, N. G. (2000). The Savers-Spenders Theory of Fiscal Policy. American Economic Review, 90, 120-125. https://doi.org/10.1257/aer.90.2.120
Mose, N. G. (2014). Effect of Government Expenditure on Economic Growth in East Africa: A Disaggregated Mode. MSc. Thesis, Egerton University.
Mountford, A., & Uhlig, H. (2009). What Are the Effects of Fiscal Policy Shocks? Journal of Applied Econometrics, 24, 960-992. https://doi.org/10.1002/jae.1079
Mulinge, S. M. (2019). Effectiveness of Youth Empowerment Programs in Mitigating Youth Unemployment in Kayole, Nairobi County. MSc. Thesis, St Paul’s University.
Murithi, A. N., & Kinyanjui, S. M. (2019). Taxation and Economic Growth in Kenya. Journal of Economics and Public Finance, 5, 219-228.
Murunga, J., Muriithi, M. K., & Wawire, N. W. (2021). Estimating the Size of the Informal Sector in Kenya. Cogent Economics & Finance, 9, Article 2003000. https://doi.org/10.1080/23322039.2021.2003000
Ndung’u, N. (2006). Public Investment and Economic Growth in Kenya. AERC Research Paper 155. African Economic Research Consortium.
Ogutu, M. (2018). Effect of E-Banking on Financial Performance of Listed Commercial Banks in Kenya. MSc. Thesis, KCA University.
Ogutu, M. O., Nyang’oro, J., & Akello, J. (2018). Tax Administration Reforms and Revenue Mobilization in Kenya. International Journal of Public Administration, 41, 352-363.
Othuon, V. O., & Oyugi, M. A. (2017). The Impact of Key Macroeconomic Variables on Agricultural Infrastructure Investment and Output in Kenya (2005 to 2016). Journal of Economics and Sustainable Development, 8, 182-191.
Oyugi, W. O. (2017). Fiscal Policy and Economic Growth: Empirical Evidence from Kenya. Journal of Economics and Sustainable Development, 8, 38-44.
Perotti, R. (2005). Estimating the Effects of Fiscal Policy in OECD Countries. The Economic Journal, 115, F427-F448.
Raisová, M., & Ďurčová, J. (2014). Economic Growth-Supply and Demand Perspective. Procedia Economics and Finance, 15, 184-191. https://doi.org/10.1016/S2212-5671(14)00476-6
Reinhart, C. M., Reinhart, V. R., & Rogoff, K. S. (2012). Public Debt Overhangs: Advanced-Economy Episodes since 1800. Journal of Economic Perspectives, 26, 69-86. https://doi.org/10.1257/jep.26.3.69
Riera-Crichton, D., Vegh, C. A., & Vuletin, G. (2016). Tax Multipliers: Pitfalls in Measurement and Identification. Journal of Monetary Economics, 79, 30-48. https://doi.org/10.1016/j.jmoneco.2016.03.003
Romer, C. D., & Romer, D. H. (2010). The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. American Economic Review, 100, 763-801. https://doi.org/10.1257/aer.100.3.763
Roubini, N., & Sachs, J. D. (1989). Political and Economic Determinants of Budget Deficits in the Industrial Democracies. European Economic Review, 33, 903-938. https://doi.org/10.1016/0014-2921(89)90002-0
Sims, C. A. (1980). Macroeconomics and Reality. Econometrica: Journal of the Econometric Society, 48, 1-48. https://doi.org/10.2307/1912017
Tapsoba, R. (2012). Do National Numerical Fiscal Rules Really Shape Fiscal Behaviours in Developing Countries? A Treatment Effect Evaluation. Economic Modelling, 29, 1356-1369. https://doi.org/10.1016/j.econmod.2012.03.003
Thiong’o, M. W., & Onyuma, S. O. (2019). Public Debt Sustainability in Kenya: A Threshold Analysis. International Journal of Economics, Commerce and Management, 7, 209-226.
Wyplosz, C. (2012). Fiscal Rules: Theoretical Issues and Historical Experiences. National Institute Economic Review, 220, R22-R37.