Effectiveness of Fiscal Policy in Stimulating GDP Growth

Abstract

This study examines the effectiveness of fiscal policy in stimulating the GDP growth. It further determines the most effective channel for growth stimulation. We use Structural Vector Autoregressive (SVAR) model on Kenyan quarterly time series data from 2006 to 2019 to track the response of GDP growth to fiscal policy. The findings reveal that, fiscal policy is effective for growth stimulation only when tax revenue and public debt are used. We find government expenditure is insignificant in influencing growth in Kenya while inflation rate having negative effects on growth. Relative to government expenditure and tax revenue, public debt was found to be the most effective fiscal policy item for growth stimulation. To realize increased growth in Kenya, this study recommends the use of an expansionary fiscal policy through tax revenue and public debt with proper control on inflation.