Effectiveness of monetary and fiscal policies on the Kenyan economy a vector autoregressive approach
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Date
2014
Authors
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Publisher
University of Dar es Salaam
Abstract
This study seeks to investigate the relative effectiveness of monetary and fiscal policies on economic growth in Kenya. Gross domestic product (GDP) is used as a measure of economic activity, broad money supply (M3) is used as a proxy for monetary policy while government expenditure is taken as a measure for fiscal policy. Real annual time series data for the period 1966-2012 is utilised.The hypotheses for the study are that; (a) monetary policy exerts more influence on economic growth than fiscal policy; and (b) fiscal policy exerts more influence on economic growth than monetary policy. The study employs vector autoregressive model; variance decompositions, impulse response functions and granger causality test from the VAR model are used in the analysis. Findings from the study show a clear dominance of monetary policy over fiscal policy. Monetary policy displays a large and predictable influence on output compared to fiscal policy.Fiscal policy also has a significant influence on economic growth as indicated by variance decompositions and impulse response functions, this is however less significant in comparison with monetary policy. The findings suggests that for better macroeconomic management, the two policies should be employed in a complementary manner. The estimated model is found to have structural stability, Lagrange Multiplier test also indicates no residual serial correlation. This research therefore supports the monetarist view that monetary policy exerts more influence on economic activity as opposed to the fiscalist point of view that fiscal policy is more effective in explaining economic growth.
Description
Available in print form, East Africana Collection, Dr. Wilbert Chagula Library, Class mark (THS EAF HG1343.P556)
Keywords
Monetary policy, Fiscal policy, Kenya
Citation
Pkomu, C,C (2014) Effectiveness of monetary and fiscal policies on the Kenyan economy a vector autoregressive approach.Master dissertation, University of Dar es Salaam, Dar es Salaam.