Money Supply, Inflation Rate, Exchange Rate and Growth of Domestic Private Investment in Kenya

Abstract

The objective of the study was to evaluate the effect of selected macroeconomic variables on the growth of the domestic private investment. The study used a time series quarterly data spanning 1997 t0 2018.  Autoregressive Distributed Lag (ARDL) model was adopted to examine if changes in select macroeconomic variables determine the growth of domestic private investment in Kenya. These selected macroeconomic variables are; central bank rate, the repo rate, t-bill rate, money supply, exchange rate, and inflation.  The bound cointegration testing procedure revealed the existence of a long-run cointegration. The long-run cointegrating model estimated shows that private domestic investment varies significantly and negatively with the central bank rate and the commercial lending rate as well. However, an increase in the money supply increases the level of investment. Another significant observation is that moderate inflation is critical in increasing the level of investment. These results point to one critical revelation; monetary policy conduct is essential in driving private domestic investment. An error correction model shows that 62% of deviation from the cointegration path is corrected with a quarter