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

Listed author(s):
  • Cyrus MUTUKU

    ()

    (Mount Kenya University, Kenya)

Registered author(s):

    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.

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    Article provided by KSP Journals in its journal Journal of Economics Library.

    Volume (Year): 2 (2015)
    Issue (Month): 3 (September)
    Pages: 173-191

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    Handle: RePEc:ksp:journ5:v:2:y:2015:i:3:p:173-191
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    1. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, 09.
    2. Jocelyn Horne, 1991. "Indicators of Fiscal Sustainability," IMF Working Papers 91/5, International Monetary Fund.
    3. Adrian Penalver & Gregory Thwaites, 2006. "Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk," Bank of England working papers 307, Bank of England.
    4. Jonathan David Ostry & Abdul d Abiad, 2005. "Primary Surpluses and sustainable Debt Levels in Emerging Market Countries," IMF Policy Discussion Papers 05/6, International Monetary Fund.
    5. Charles Wyplosz, 2011. "Debt Sustainability Assessment: Mission Impossible," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    6. Emilia Câmpeanu & Andreea Stoian, 2010. "Fiscal Policy Reaction in the Short Term for Assessing Fiscal Sustainability in the Long Runin Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 501-518, December.
    7. Andreea Stoian, 2008. "Analyzing Causality Between Romania’S Public Budget Expenditures And Revenues," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 11(11(528)(s), pages 60-64, November.
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