Selected Macroeconomic Determinants of Economic Growth in Kenya: A Co-integration Approach

Abstract

: Kenya’s GDP performance is constrained by high level of fiscal deficits, interest rates, and fluctuating exchange rates. Consequently, the their Potential is 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 drivers on economic growth. The study was anchored on Endogenous growth theory. Anchored in the philosophical paradigm of positivism, the study adopted an explanatory research design and relied on secondary data from the Kenya Bureau of statistics 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. The long run ARDL results indicated that the coefficients of; exchange rate 0.080 ((cid:6) − (cid:8)(cid:9)(cid:10)(cid:11)(cid:12) 0.033 < 0.05) , and lending interest rate −0.172 ((cid:6) − (cid:8)(cid:9)(cid:10)(cid:11)(cid:12) 0.011 < 0.05) significantly affected economic growth. The findings of this study will be useful in fiscal and monetary policy formulation, it inform the government on ways of finding possible solution to the economic growth challenges. The study submits that policymakers in CBK ought to adopt policies that maintain and keep stability in exchange rate, determine effective lending interest rates and maintain a level of fiscal deficit commensurate to economic growth in Kenya. Distributed this preference. If the cumulative sum goes outside the area between the two critical lines, the test finds parameter instability. The statistic that the CUSUM test is Using the Lagrangian Multiplier (LM test), the researchers tested for autocorrelation.