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Budget deficit-macroeconomic variables nexus in Kenya

Author

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  • Philip Doris Syombua

    (Department of Economics and Social Sciences, Faculty of Economics, University of Nairobi, Nairobi, Kenya)

Abstract

Aim/purpose – The aim of this paper was to establish the nexus between a budget deficit and selected macroeconomic variables in Kenya. This adds to the existing literature while the methodology and choice of the econometric tools used improve the predictability of the link between a budget deficit and macroeconomic variables. The results are relevant to policy makers as they may help improve understanding of budget deficit management. Design/methodology/approach – The study used time series data for the period from 1976 to 2018 and employed the Vector Autoregression model reinforced by the Keynesian Mundell–Fleming framework. Findings – The impulse response function derived from the vector autoregression model revealed that shocks from both interest rate and exchange rate had a positive impact on budget deficit. External debt servicing and current account deficit shocks had a negative impact on the budget deficit. Research implications/limitations – Interest rate and exchange rate policies remain key in reducing the growth of the budget deficit. Policies on external debt servicing, such as timely payment of debts and prudent investment of borrowed funds, will also reduce the budget deficit. Originality/value/contribution – The study employed transmission mechanism which involves multiple equations to establish the nexus between a budget deficit and macroeconomic variables in Kenya.

Suggested Citation

  • Philip Doris Syombua, 2021. "Budget deficit-macroeconomic variables nexus in Kenya," Journal of Economics and Management, Sciendo, vol. 43(1), pages 270-292, May.
    • Handle: RePEc:vrs:jecman:v:43:y:2021:i:1:p:270-292:n:17
    DOI: 10.22367/jem.2021.43.13
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    References listed on IDEAS

    as
    1. Mohammed Ershad Hussain & Mahfuzul Haque, 2017. "Fiscal Deficit and Its Impact on Economic Growth: Evidence from Bangladesh," Economies, MDPI, vol. 5(4), pages 1-19, October.
    2. Jang, Kyungho & Ogaki, Masao, 2004. "The effects of monetary policy shocks on exchange rates: A structural vector error correction model approach," Journal of the Japanese and International Economies, Elsevier, vol. 18(1), pages 99-114, March.
    3. Ali Salman Saleh & Charles Harvie, 2005. "The Budget Deficit And Economic Performance: A Survey," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 50(02), pages 211-243.
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    More about this item

    Keywords

    budget deficit; selected macroeconomic variables; Kenya;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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