Effects of Fiscal Policy on Private Investment in Kenya

Private investment in Kenya has been low for the last four decades. This has stimulated much concern to the policy makers¿ bearing in mind that investment is a key variable influencing economic growth. The government has over the years designed economic policies with an aim of rejuvenating private investment which was robust during the first decade of independence before deteriorating in the other decades. Fiscal policy has been a major focus towards this direction. This study was carried to investigate the effects of fiscal policy on private investment in Kenya. The study adopted modified flexible accelerator model to enlighten on the economic relationship between private investment and the other variables. It applied vector auto-regression modeling technique and error correction model to estimate the effects of fiscal policy variables on private investment. The study revealed that fiscal policy design and implementation matters to private investment. It was found that taxes, government expenditure, government debt servicing and fiscal reforms could either promote or deter private investment both in the short-run and in the long-run.