Open AccessThe Effects of Current Account Deficits on Economic Growth: Evidence from Kenya
Author(s) -
Patrick Mugendi Mugo,
Wafula Masai,
Kennedy Osoro
Publication year - 2021
Publication title -
journal of economics and public finance
Language(s) - English
Resource type - Journals
eISSN - 2377-1046
pISSN - 2377-1038
DOI - 10.22158/jepf.v7n4p59
Subject(s) - current account , cointegration , economics , causality (physics) , granger causality , prosperity , error correction model , unit root , gross fixed capital formation , macroeconomics , development economics , monetary economics , econometrics , economic growth , foreign direct investment , physics , quantum mechanics , exchange rate
The study examines the effects of current account deficits on economic growth. It also evaluates the direction of causality between the current account deficits and economic growth. These have in the recent past been analyzed in developed and developing economies. In contributing to this ongoing debate, the study applied unit root tests, cointegration analysis, a dynamic vector error correction model and Toda-Yamamoto Granger-causality representation using annual time series data for Kenya from 1980 to 2016. There is evidence that in the long run, current account deficit has significant positive effect on economic growth in Kenya. The evidence suggests a bidirectional causality running from current account deficit to economic growth with feedback effects. The study underscores the need for the authorities to utilize current account deficits to strictly finance public investment to foster gross fixed capital formation, for shared prosperity in Kenya. The evidence underscores the need for more country specific studies in sub-Saharan Africa.