Financial liberalization and fiscal variables in Kenya

Abstract

This study has attempted to highlight one of the specific areas that are affected by financial liberalisation. It was exploring into the response of fiscal variables to financial sector reforms and what kind of fiscal policy mix is available to implement in a liberalised financial market. Fiscal deficit was chosen as the representative variable and broken into expendiure and revenue and data was collected from 1971 to 2000 covering well enough the period of liberalisation (that is, 199112). The Chow Breakpoint test was used in addition to OLS to establish the effects of liberalisation. The findings of the study revealed that the models were satisfactory and fulfilled the objectives of the study. The models, despite their imperfections, were found to trace the turning points at the time of liberalisation, indicating that it was valid. All the three models estimated gave a reasonably good R2 and highly significant F-statistic. The models also passed the diagnostic tests indicating the results to be representative of the data used and the model to be valid. The results showed a significant impact of liberalisation on government expenditure cm~ ta~ revenues but insignificant on fiscal ..~ deficits - Based on these results, the study came up with the appropriate fiscal policy mix that can be used in the liberalized era. The study also came up with the result that even though the real fiscal deficits were at low levels, there was existence of macroeconomic instability. Emphasis is therefore laid on effective fiscal policies guided by the appropriate fiscal policy mix in collaboration with monetary policies to overcome this situation.