Abstract

Literature is scanty on the relationship between domestic debt and economic growth with most researchers focusing on external debt. However, the shift in the composition of overall public debt in favour of domestic debt in sub-Saharan Africa countries has brought to the fore the need for governments to formulate and implement prudent domestic debt management strategies to mitigate the effects of the rising debt levels. This study investigates the effects of domestic debt on economic growth in Kenya. The issue is examined empirically using advanced econometric technique and quarterly time series data spanning 2000 to 2010. The Jacque Bera (JB) and Augmented Dickey-Fuller (ADF) tests have been used preliminarily in investigating the properties of the macroeconomic time series in the aspect of normality and unit roots respectively. The long run relationship between the variables was investigated using the Engel-Granger residual based and Johannes VAR based cointegration tests. There is evidence of cointegration hence an error correction model has been used to capture short run dynamics. The study shows that domestic debt expansion in Kenya, for the period of study, has a positive and significant effect on economic growth. In view of this, the study recommends that the Kenyan government should encourage sustainable domestic borrowing provided the funds are utilized in productive economic avenues.

Keywords:

Economic growth, debt management, public domestic debt, size of government,

References

Competing interests

The authors have no competing interests.

Open Access Policy

This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Copyright

The authors have no competing interests.