Asymmetric effects of fiscal policy on inflation in Kenya.

Abstract

This study investigates the asymmetric effects of fiscal policy on inflation (INF) in Kenyausing data for the period from 1991 to 2021. The study differs from previous studies byapplying the non-linear autoregressive distributed lag (NARDL) modeling to captureasymmetric dynamics. The study identified a long-run equilibrium and cointegratingrelationship among the study variables, with the findings indicating the existence ofasymmetric long-run effects of public debt (PD) and government spending (GS) on INF.A positive relationship between increases in PD and INF in the short-run is also estab-lished, while decreases in PD are found to increase INF in both the long-run and short-run. Increases in GS raise INF, while decreases in tax revenue (TR) reduce INF in thelong-run. Output gap has a persistent positive relationship with INF, while interest ratenegatively affects INF. As such, the study recommends that policymakers should priori-tize fiscal measures, especially government expenditure by ensuring that any additionalspending does not cause inflationary pressures. The government should also regulatePD by ensuring that its levels align with the objective of INF control.