Abstract

This study has examined the effects of Government policy and Commodity price shocks on private investment in Kenya. Due to non-stationarity of the variables in the model and the existence of a cointegrating relation, an error correction mechanism was used. The estimated long-run results indicate that real GDP growth rate, real lending interest rate and export price index have significant influence on private investment in Kenya. In the short run however, real public infrastructural investment and real public non infrastructural investment, real GDP growth rate and real lending interest rate are significant factors in explaining private investment in Kenya. Political uncertainty through the political regime dummy has also been found to be significant. Given the positive impact of real public infrastructural and public non-infrastructural investment, the study suggests policies such as allocating public sector resources to capital accumulation and with respect to the negative effect of commodity price shocks, there is need to diversify the country’s production and export base. Since real lending interest rates have a significant positive effect, it is essential to maintain the financial liberalization status and in order to maintain the important link between GDP and private investment, there is need to expand the agricultural and industrial sectors. Political uncertainty being a major blow to private investment, the Government should set up proper mechanism to curb corruption among its officials, improve on governance and set proper measures and controls over top officials

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School	: School of Law, Economics and Government
Issued Date	: 2006

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