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Assessing Fiscal Policy Cyclicality and Sustainability: A Fiscal Reaction Function for Kenya

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  • Cyrus MUTUKU

    (Mount Kenya University, Kenya)

Abstract

This study sought to determine whether fiscal policy for Kenya is on a sustainable path by estimating a fiscal reaction function. A fiscal reaction function is a rule derived from an inter-temporal government budget constraint which reveals the response of government to accumulating public debt. It also sought to establish whether fiscal policy responds to business cycles by determining its cyclical nature. The study used annual time series data spanning 1970 to 2013 and multivariate analysis was based on VAR and VECM model. The empirical analysis reveals that, firstly fiscal behavior is incoherent with inter-temporal budget constraint and the moderation is low. This implies that if fiscal adjustment is not done, debt is likely to accumulate. Secondly, election cycles expenditures threaten Kenya’s long run fiscal sustainability. Finally, fiscal policy is a-cyclical meaning that stabilization objective is not considered while conducting the fiscal policy. The study recommends that fiscal rules, independent fiscal committee and comprehensive fiscal regulations laws should be enacted to correct these biases.

Suggested Citation

  • Cyrus MUTUKU, 2015. "Assessing Fiscal Policy Cyclicality and Sustainability: A Fiscal Reaction Function for Kenya," Journal of Economics Library, KSP Journals, vol. 2(3), pages 173-191, September.
    • Handle: RePEc:ksp:journ5:v:2:y:2015:i:3:p:173-191
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    Cited by:

    1. Campos, Eduardo Lima & Cysne, Rubens Penha, 2017. "A time-varying fiscal reaction function for Brazil," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 795, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    2. Chemnyongoi, Hellen, 2023. "Fiscal Policy Sustainability in Kenya," African Journal of Economic Review, African Journal of Economic Review, vol. 7(4), June.
    3. William Irungu Nganga & Julien Chevallier & Simon Wagura Ndiritu, 2018. "Regime changes and fiscal sustainability in Kenya with comparative nonlinear Granger causalities across East-African countries," Working Papers halshs-01941226, HAL.
    4. Irungu, William Nganga & Chevallier, Julien & Ndiritu, Simon Wagura, 2020. "Regime changes and fiscal sustainability in Kenya," Economic Modelling, Elsevier, vol. 86(C), pages 1-9.

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    More about this item

    Keywords

    Fiscal policy; Sustainability; Fiscal reaction.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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