Nexus between Selected Macroeconomic Variables and Economic Growth in Kenya (1980-2019)

Abstract

Economic growth challenges dominate government policy and research agendas in today's globalized world. The Kenya Vision 2030 is the country's development roadmap, with the overarching goal of becoming a middle-income nation that is not only globally competitive and successful but also provides a good quality of life for its residents and a middle-income earning economy. In Kenya, the relationship between macroeconomics and economic growth has received little attention. The specific objectives of this study were:

• To establish the influence of external debt,


• To examine the influence of domestic debt,


• To determine the influence of inflation rate, and


• To assess the influence of foreign exchange rate on economic growth in Kenya

Keynesian and classical theories guided this study. The study used an explanatory research design and adopted positivism philosophy, which is based on ontological principles and doctrines, implying that reality and truths are not only free but also independent of the observer. Annual data from 1980 to 2019 giving 40 observations were used. Vector Error Correction (VEC) Model was customized to analyze the long-run and short-run contribution of macroeconomic variables and gross domestic product in Kenya. From the VECM model, R-square value was 58.62, and Chi-square value was 26.913 (p > Chi2 = 0.0494), which showed that VECM was fit for parameter estimation. The coefficient of the exchange rate was , with a p-value of . Domestic debt reported a coefficient of , with a p-value of 0.019. The coefficient of inflation was , while external debt reported a coefficient of 0.0003 with a , which had a positive significant influence on economic growth. Based on the findings, the country may need to manage inflation since when inflation exceeds a particular threshold, economic growth is projected to halt. The study finds that domestic debt expansion in Kenya has a negative and significant influence on economic growth during the study period. As a result, this analysis suggests that the Kenyan government limits domestic borrowing. The government should favor macroeconomic policies that increase the stability of Kenya's exchange rate against the major international trade currencies if the foreign exchange rate has a beneficial effect on economic growth in Kenya.