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 economy has been characterized by sluggish cycles of low economic growth with policymakers revising their policies. Potential increase in economic growth level is central for Kenya to address macroeconomic instability. 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 , and lending interest rate  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.