The Effects of Current Account Deficit on Economic Growth in Kenya

Abstract

The study explored effects of current account deficit on growth in Kenya by using series data between1975 and 2018. The long run effects between variables were investigated using co-integration test and the results confirmed such effects. The Vector Error Correction Model was applied which depicted that both current account deficit and growth were positively affected by fixed capital formation at one percent level of significance Short term connection showed foreign direct investment and fiscal balance positively impacted economic growth at ten and five percent levels of significance. Granger causality results failed to establish direct causality between the deficit and growth and vice versa. Key study recommendations included prescription of appropriate trade, monetary and fiscal policies which promote increased exports, depreciation of domestic exchange rate against foreign ones and fiscal consolidation