Dynamics of Current Account Deficit: A Kenyan Experience

Abstract

Large and persistent current account deficits are among the most serious problems of many developing countries. The Current Account in Kenya has continuously been in deficit in the last three decades prompting the country to rely increasingly on risky short-term flows to balance the accounts. This has consistently created a financing gap. The purpose of this study was to provide empirically characterization of the dynamics of current account deficit and other macroeconomic variables. Based on the absorption approach, the study established the persistence and determinants of the current account deficit; Explanatory research design was adopted. Due to the time series nature of the study, Multivariate Vector Autoregressive, Granger causality test together with Variance decomposition and impulse response functions were used to empirically establish the determinants and dynamics of …