JEFMS Journal

ABSTRACT:

Human civilization has always been centred on economic growth. Economic growth difficulties are the main focus of government policy and study in the modern, globalized world. Kenya's overarching goal is to become a middle-income nation that is both globally competitive and wealthy and provides its residents with a high quality of life. The Kenya Vision 2030 is the country's development strategy. Different perspectives on the relationship between inflation, exchange rate and economic growth have shown diverging results. This study's particular goals were to determine the effect of inflation and exchange rate on Kenya's economic growth using Keynesian theory. This study used explanatory research design and adopted positivism philosophy. Annual data from 1980 to 2019 giving 40 observations was used. Vector Error Correction (VECM) Model was customized in analyzing the long run and short-run contribution of macroeconomic variables and gross domestic product in Kenya. From the VECM model, R-square value was 58.62, Chi-square of 26.913 (p > Chi2 = 0.0494) showing VECM was fit for parameter estimation. The coefficient of exchange rate was -0.828 with a p-value of 0.001 while the coefficient of inflation was 0.055,p value=0.020.The findings of this study will provide good fiscal and monetary policy recommendations to the government as well as guidance on how to solve the issue of weak economic growth. Because economic growth is predicted to slow down when inflation exceeds a particular threshold, the nation must control inflation. The government should support macroeconomic policies that strengthen the stability of Kenya's exchange rate versus the major world trading currencies while aiming for an ideal level of inflation because foreign currency rates have a detrimental impact on economic growth in Kenya.

KEYWORDS:

REFERENCES:

1) Ansari, M. I., & Ahmed, S. M. (2001). Time series analysis of tea prices: An application of ARIMA modelling and cointegration analysis. Indian Economic Journal, 48(3), 49.

2) Ndung'u, S. G. (2018). Dynamics of inflation and its effects on the Kenyan economy (Doctoral dissertation, Strathmore University).

3) Chowdhury, Y., Hamid,K., & Akhi, R.A., (2019) Impact Of Macroeconomic Variables On Economic Growth: Bangladesh Perspective. Information Management and Computer Science, 2(2):19-22

4) Cohen, D. K., & Nordås, R. (2014). Sexual violence in armed conflict: Introducing the SVAC dataset, 1989–2009. Journal of peace research, 51(3), 418-428.

5) Erickson Matundura, Dr, Elvis Kiano, and Alfred Serem (2022). "Macroeconomic Drivers of Economic Growth."

6) Gliner, J. A., Morgan, G. A., & Leech, N. L. (2011). Research methods in applied settings: An integrated approach to design and analysis. Routledge.

7) Gujarati, D. N., & Porter, D. C. (2004). Chapter 10–Multicollinearity: What happens if the regressors are correlated? Basic Econometrics”, The McGraw-Hill, 341-386.

8) Irungu, E. N. (2017). Factors that influence volatility in the foreign exchange rate in Kenya (Doctoral dissertation, United States International University-Africa).

9) Keynes, J. M. (1936). The general theory of interest, employment and money: london: MacMillan.

10) Kogid, M., Asid, R., Lily, J., Mulok, D., & Loganathan, N. (2012). The Effect of Exchange Rates on Economic Growth: Empirical Testing on Nominal Versus Real. IUP Journal of Financial Economics, 10(1).

11) Lomnicki, Z. A. (1961). Tests for departure from normality in the case of linear stochastic processes. Metrika. 4(1), 37-62.

12) Ramadani, V., Dana, L.P. Kurtishi-Kastrati, S. & Ratten and Ratten, V. (2016). "Speed up financial development for overseas direct investment? The Macedonian case, "Int. The case." J. Concurrence, Vol. 1, Number 1, pp. 71-98.

13) Wepukhulu, J. M., & Otieno, O. G. (2019). EFFECT OF MACROECONOMIC FACTORS ON ECONOMIC GROWTH IN KENYA. International Journal of Economics, 4(1), 43-67.

14) World Bank, (2007). World Development Indicators. World Bank Publications.