Dynamic Impacts of Changes in Government Spending on Economic Growth in Kenya: A Structural VAR Analysis

Mahrous, Walaa (2016): Dynamic Impacts of Changes in Government Spending on Economic Growth in Kenya: A Structural VAR Analysis. Published in: 51st Annual Conference for Institute of Statistical Studies and Research, Cairo, Egypt. (December 2016)

Abstract

Relationship between government spending and economic growth is still indecisive in both theory and empirical studies. Since its independence in 1963, the Kenyan government has been expanding its expenditure to achieve high levels of economic growth and development. However, this goal has witnessed many upward and downward trends. This paper aims at examining the dynamic effects of government expenditure on economic activity (GDP) in Kenya. The paper applies a Structural Vector Auto Regression (SVAR) model and uses quarterly data set between 1991 and 2012 to estimate the Kenyan government expenditure multiplier. Results have shown that the effect of government spending on output in Kenya appears to be weak and nonpersistent. These results are justified by high government debt to GDP ratio, high debt servicing, and high marginal propensity to import in Kenya.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government Spending, Economic Growth, SVAR Model.
• Subjects: H - Public Economics > H0 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General

References

1. Albala-Bertrand, J. M. & E. C. Mamatzakis (2001): "Is Public Infrastructure Productive? Evidence from Chile", Applied Economics Letters, Vol. 8, Issue 3, pp. 195-98.

2. Alexiou, Constantinos (2009): "Government Spending and Economic Growth: Econometric Evidence from the South Eastern Europe (SEE)", Journal of Economic and Social Research, Vol. 11, No. 1, pp. 1-16.

3. Barro, R. (1990): "Government Spending in a Simple Model of Endogenous Growth", Journal of Political Economy, Vol. 98, No. 5,pp. 103-125.

4. Baum, Donald N. & S. Lin (1993): "The Differential Effects on Economic Growth of Government Expenditures on Education, Welfare, and Defense", Journal of Economic Development, Vol.18, No. 1, pp. 175-185.

5. Bergh, Andreas & Magnus Henrekson (2011): Government Size and Growth: A Survey and Interpretation of the Evidence, Research Institute of Industrial Economics Working Paper No. 858, Stockholm.

6. Blake, Tarick (2013): "Measuring the Impact of the Jamaican Government on the Economy via Fiscal Multipliers", Journal of Business, Finance & Economics in Emerging Economies, Vol. 8, No. 1, pp. 26-53.

7. Blanchard, Olivier & Roberto Perotti (2002): "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output", Quarterly Journal of Economics, Vol. 107, No. 4, pp. 1329-1368.

8. Bose, Niloy et al (2007): "Public Expenditure and Economic Growth: A Disaggregated Analysis for Developing Countries", The Manchester School, Vol. 75, Issue 5, pp. 533-556.

9. Chude, Nkiru Patricia & Daniel Izuchukwu Chude (2013): "Impact of Government Expenditure on Economic Growth in Nigeria", International Journal of Business and Management Review Vol. 1, No. 4, pp. 64-71.

10. Devarajan, Shantayanan et al (1993): What do Governments buy? The Composition of Public Spending and Economic Performance, Policy Research Working Paper No. 1082, World Bank.

11. East African Community (EAC): EAC Statistics Portal-Statistics Database, in: http://www.eac.int/ statistics/index.php? option=com_content&view=article&id=141&Itemid=111#bop.

12. Guseh, J. S. (1997): "Government Size and Economic Growth in Developing Countries: A Political-Economy Framework", Journal of Macroeconomics, Vol. 19, No. 1, pp. 175–192.

13. Hope, Kempe Ronald (2012): "Managing the Public Sector in Kenya: Reform and Transformation for Improved Performance", Journal of Public Administration and Governance, Vol. 2, No. 4, pp. 128-143.

14. International Monetary Fund (IMF): World Economic Outlook (WEO) Database April 2016, at: http://opendataforafrica.org/wiraszf/imf-world-economic-outlook-weoapril-2016.

15. Kweka, Josaphat P. & Oliver Morrissey (2000): Government Spending and Economic Growth in Tanzania, 1965-1996, Centre for Research in Economic Development and International Trade (CREDIT)Research Paper No. 00/6, University of Nottingham.

16. Landau, D. (1983): "Government Expenditure and Economic Growth: A Cross-Country Study", Southern Economic Journal, Vol. 49, pp.783-97.

17. M’Amanja, D. & O. Morrissey (2005): Fiscal Policy and Economic Growth in Kenya, CREDIT Research Paper No. 05/06.