Fiscal policy stance and public expenditure in Kenya

Abstract

This paper investigates the relationship between fiscal policy stance and public expenditure in Kenya from 1964 to 2015 using a Vector Error Correction Model. The results indicate that there is a negative relationship between fiscal policy stance and public expenditure. The findings further indicate that fiscal policy and public expenditure are cointegrated using the Johansen test and the bound test but there is no short-run causality between the variables as indicated by the Wald test statistics. This means that fiscal policy stance does not have a strong direct effect on public expenditure as supported by the theory of fiscal policy that policy makers could have a lower incentive to pursue public interests as compared to their personal interests.