Impact of Macroconomic Variables on Domestic Investments in Kenya

Abstract

The research set to investigate impacts of macroeconomic variables on performance of domestic investments for Kenya from 1975 to 2018. ARDL estimation technique was employed in estimation of domestic investments model. Macroeconomic variables under study included; GDP, Government expenditure, inflation, interest rates, amount of credit to private sector, external debts, trade openness and exchange rates. Time series properties on stationarity test were conducted using ADF unit root tests. The finding showed existence of differences between macroeconomic factors on domestic investment. For the long run period, results revealed existence of significant effects for GDP, public expenditure, real exchange rates and trade openness variables on domestic investments in Kenya. However, no significant effects established for the inflation, real interest rates, external debts and credit to private sector on domestic investment. Conversely, the estimated short-run model revealed that GDP annual growth rate, public expenditure, external public debts first lag and real exchange rate first lag had short run significant effects on the performance of domestic investment at 5% significant level. The rest of the variables that include, credit to private sector, inflation, interests’ rates, trade openness had expected signs but coefficients were not significant. Shocks in the economy were represented by co-integrating ECM coefficient of negative 0.76 and t-statistics significant at 5% level. This suggests that previous short run shocks convergence to long run equilibrium at a speed of 76% thus takes approximately one and half years. The results suggest the need for the government of Kenya to ensure enabling macroeconomic environment and promote domestic investment enhancing policy for accelerating economic transformation.