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Explaining the Relationship between Public Expenditure and Economic Growth in Kenya using Vector Error Correction Model (VECM)

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  • Christine Nanjala Simiyu

    (KCA University)

Abstract

The rapid growth in public expenditure in Kenya since independence has caused concern among policy makers on its implication on economic growth. The main aim of this study therefore was to explain the relationship between economic growth and public expenditure on Health, Education, Military and Infrastructure in Kenya. The study used a time series data collected between 1963 - 2012. Johansen Cointegration Test and Vector Error Correction Model (VECM) was applied on the time series data to estimate the short-run and long-run relationships between public expenditures and economic growth in Kenya. The results suggests that public expenditure components and economic growth co-move towards a long run equilibrium with a speed of adjustments of approximately 3.6% after short run fluctuations in the equilibrium. Furthermore, the results show no casual relationship between public expenditure and economic growth in Kenya. However, there exist a unidirectional causation between Military and Health expenditures - Military expenditures "Granger Cause" Health expenditures. Hence, a change in Military expenditures cause a change in Health expenditures. These findings suggests that the Government of Kenya switch military expenditures for health expenses in Kenya, but not vice versa.

Suggested Citation

  • Christine Nanjala Simiyu, 2015. "Explaining the Relationship between Public Expenditure and Economic Growth in Kenya using Vector Error Correction Model (VECM)," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 4(3), pages 19-38, September.
    • Handle: RePEc:sek:jijoes:v:4:y:2015:i:3:p:19-38
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Vector Error Correction Model (VECM); Granger Causation; Public expenditures Components; Economic Growth; Kenya;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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