Government expenditure and economic growth in Kenya: An investigation of causal relationship

Abstract

This study attempts to untangle the nature of the relationship between government expenditure and economic growth in Kenya by examining the intertemporal interactions between real GDP and the share of government spending in GDP. Using vector autoregressive (VAR), the study tests for the existence and direction of Granger-causality between real GDP and the share of government expenditure in GDP. The Augmented Dickey Fuller (ADF) and Phillip-Perron (PP) unit root tests, Johansen-cointegration test, vector error correction model (VECM) and Granger-causality tests are performed. All series except the share of government consumption expenditure in GDP were found to be nonstationary in levels. Following the existence of cointegration, error correction models were built for the share of government expenditure, the share of government investment expenditure and economic growth, in each case. This study finds no causality between the share of government expenditures and economic growth in Kenya. The analysis found no evidence that government spending can increase economic growth in Kenya.