Intervening Effect of Selected Macroeconomic Factors on Fiscal Policy Stance and Public Expenditure in Kenya

Abstract

This paper investigates the intervening effect of selected macroeconomic factors on the relationship between fiscal policy stance and public expenditure in Kenya using time series modelling. This paper is underpinned by the theory of fiscal policy, Wagner’s Law of increasing state activities and Peacock-Wiseman hypothesis. The population is the Kenyan economy while secondary data was collected from Kenya National Bureau of Statistics reports. Time series modelling was applied. The findings indicate that foreign aid and grants have an intervening effect on the relationship between fiscal policy stance and public expenditure in Kenya. Nevertheless, fiscal stance has a statistically insignificant effect on public expenditure. The results show that fiscal stance, foreign aid and grants and public expenditure are cointegrate d using the Johansen cointegration test but there is no short run causality between the variables as indicated by the Wald test statistics. The conclusion is that foreign aid and grants explain the extent to which fiscal policy stance affects the level of public expenditure in Kenya even though fiscal policy stance has an inverse relationship with public expenditure.