International Journal of Social Science & Economic Research
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Miriam Wamaitha Thuo, Lenity Kananu Mugendi

Volume - 2 Issue - 7, Pages - 3873-3889

The government of Kenya has continuously made efforts to promote private investment environment through public investment in varied forms of infrastructure as well as in implementing policies on expenditure management so as to attract private investment. Studies have shown that private investment has more impact on economic growth than public investment. Despite this, public investment in Kenya has been growing at a faster rate than private investment while economic growth has been low, stagnant or declining over the years. This paper investigated the effect of public investment on private capital formation in Kenya using rigorous dynamic time series analysis. It also investigated the moderating effect of interest rate, openness to trade, exchange rate, and credit to private sector on the relationship between private and public investment. A causal research design was employed and the non-probability purposive sampling technique was used to select the sample of 36 year's time series data for the period 1979-2015. Diagnostic tests were performed on normality, lag order selection, residual autocorrelation, collinearity, and heteroskedasticity. Using the error correction methodology, the findings indicated that public investment is complementary to private investment in Kenya and thus consistent with the crowding in hypothesis both in the short run and long run. Gross domestic product, credit availability and exchange rate had positive and significant effects on private investment while openness to trade, and real lending interest rate had a negative and significant effect on private investment.

Cite this Article:

[Thuo, Miriam Wamaitha, and Lenity Kananu Mugendi. "EFFECT OF PUBLIC INVESTMENT ON PRIVATE CAPITAL FORMATION IN KENYA." International Journal of Social Science & Economic Research 2.7 (2017): 3873-889.]

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