Relationship Between Macroeconomics Policies And Budget Deficit In Kenya

Abstract

Most of developing nations are facing budget deficit. Budget deficit has been of great concern in many developing economies. The instability in the government fiscal position is attributing to some factors such as low level of economic development, growth and instability of government revenues, control of government expenditure. The objective of the study was to investigate the effect of (macroeconomics) trade openness; money supply; tax revenue on budget deficit. The study employed the descriptive design. The population of this study was on annually money supply (M3), annually trade openness, tax revenue and budget deficit for a period of 30 years since 1985 to 2015.The time series data was collected from Central Bank of Kenya, National treasury, World Bank and International monetary fund (IMF). Stationarity was tested using ADF. Furthermore, Granger causality technique was used to access the direction of causality. The findings provide evidence to support the variable understudy are cointegrated. The budget deficit had bidirectional causality with Tax revenue, Money supply and Trade policy. The study applied vector Auto regression (VAR) to evaluate the empirical effects of Money supply, Tax revenue and Trade policy on budget deficit. The prediction will help the policy makers as well as analyst in determining monetary policy, fiscal policy and trade policy to apply at certain time in the economy. Thus, economists, analyst and policy makers may take cue on these studies and keep watchful in any changes in macroeconomics performance in the economy.