Dynamic Impacts of Changes in Government Spending on Economic Growth in Kenya: A Structural VAR Analysis

Relationship between government spending and economic growth is still indecisive in both theory and empirical studies. Since its independence in 1963, the Kenyan government has been expanding its expenditure to achieve high levels of economic growth and development. However, this goal has witnessed many upward and downward trends. This paper aims at examining the dynamic effects of government expenditure on economic activity (GDP) in Kenya. The paper applies a Structural Vector Auto Regression (SVAR) model and uses quarterly data set between 1991 and 2012 to estimate the Kenyan government expenditure multiplier. Results have shown that the effect of government spending on output in Kenya appears to be weak and nonpersistent. These results are justified by high government debt to GDP ratio, high debt servicing, and high marginal propensity to import in Kenya.