Effects of Fiscal Policy on Private Investment and Economic Growth in Kenya

Abstract

The purpose of this study was to investigate the effects of fiscal policy on private investment and economic growth in Kenya, the study uses a time series data from 1973 to 2009, the choice of the study period was informed by availability of data and the magnitude of the problem on the study period. We adopted Two stage instrumental variable estimation method to perform our regression analysis because of its adaptability. The results indicate that fiscal policy impacts on investment and investment plays a major role in the determination of the economic growth in Kenya. It is from this findings that we recommend that the following three measure a can be adopted accordingly;- reexamination of government spending to eventually make it complementary to investment, channeling more credit to the private sector, and finally designing appropriate policies that deal with the current high domestic public debt and budget deficit.

Keywords: - Fiscal policy, Private investment, Economic growth, Instrumental Variable Method