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.

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Aims: The paper attempts to examine the effects of primary budget deficits on economic growth. It reviews the nature and direction of causality between primary budget deficit and economic growth. In the recent years, these have been debated both in developed and developing countries. In contributing to this ongoing debate, the study analyzes the case for Kenya from 1980 to 2016. The evidence is intended to provide policy insights for macroeconomic stability and sustained  economic growth for shared prosperity in Kenya. Study Design: The study employs quantitative time-series research design by utilizing Stata econometrics software. Place and Duration of Study: Sample: Evidence from Kenya, from 1980 to 2016. Methodology: The study employs unit root tests, Johansen cointegration analysis, a dynamic vector error correction model and a multivariate Toda-Yamamoto Granger-causality representation. Results: The findings establish that the primary budget deficit, gross fixed capital formation, real interest rate, terms of trade, inflation growth and financial innovation have significant effects on GDP per capita growth in Kenya. Primary budget deficit has a strong and significant effect on GDP per capita growth both in short-run and long run. In the short-run, the results revealed that the primary budget deficit had a positive effect on economic growth which turned negative in the long-run. There was a unidirectional causality running from primary budget deficit to economic growth.  Conclusion: The study concludes that both in the short run and long run, primary budget deficit has strong and significant causal effects on economic growth in Kenya. The evidence underscores the need for the authorities to reduce high primary budget deficits, interest payments and domestic borrowings and strictly apply the golden rule of public finances to boost long term inclusive growth, in Kenya.

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.