The Effects of Fiscal Policy Shocks on Aggregate Demand and Economic Growth in Kenya: A VAR Analysis

Abstract

The current study examines the association amongst fiscal policy and macroeconomic variables using a Vector Autoregression (VAR) approach. The researcher aims to examine the dynamic paraphernalia of fiscal policy shocks on real GDP growth and interest rates, as well as to provide insights into the transmission mechanisms and policy implications. The analysis is based on a comprehensive dataset comprising key fiscal policy indicators, tax revenue, government expenditure, real interest rates, and real GDP growth for Kenya from 1998 to 2023. The VAR model is estimated, and robustness of results was assessed through various tests. The findings reveal that increases in government expenditure and tax revenue positively impact economic growth, while fiscal policy variables also influence interest rate dynamics. These results have important implications for policymakers in designing effective fiscal and monetary policies to stimulate economic growth and maintain financial stability. The current research contributes to the existing literature on fiscal policy and macroeconomic dynamics and suggests potential avenues for future research.