| dc.description.abstract | The purpose of this paper is to test the twin deficit hypothesis and empirical relationship between current
account balance and budget deficit while including other important macroeconomic variables such as growth,
interest rates, money supply (M3) in Kenya from 1963-2012. The study was based on co integration analysis
and error correction model (ECM). The results reveal a long-run association between the trade deficit and the
fiscal deficit. The findings indicate that the Keynesian view fits well for Kenya since the causality runs from
budget deficit to current account deficit. We detected unidirectional causation between the twin deficits,
running from budget deficit to current account directly and indirectly through budget deficits which raise real
interest rates, crowd out domestic investment, and cause the currency to appreciate in relation to the other
currencies and further deteriorates the current account deficit.
Keywords: current account, fiscal balance, co integration, granger causality, Keny | en_US |
