Determining the effect of money supply as a ratio of GDP on economic growth in Kenya from 1985-2020

Abstract

The study sought to determine the effect of money supply as a ratio of GDP on economic growth in Kenya from 1985-2020. Data on GDP was used as a proxy for economic growth. The study was based on financial intermediation theory backed up by other theories related to financial deepening. The study adopted a historical research design. A bivariate Autoregressive model (bVAR) was used in the study. Data analysis employed both descriptive statistics and inferential statistics. Economic growth is important, and one of the drivers of economic growth is financial deepening. Kenya has been developing its financial sector in order to achieve economic growth. However, there are controversies on the relationship between economic growth and financial deepening; there are no universal conclusions on the nature of the relationship between financial deepening and economic growth. The study established that money supply has a negative effect on economic growth in the long run in Kenya. In this regard, the study recommends that the government tighten the monetary policy regarding money supply.