Autoregressive distributed lag analysis of international trade and economic growth: empirical evidence from Kenya

Abstract

Attainment of high and sustainable economic growth is one of the macroeconomic objectives countries endeavour to realise using different economic policies prescribed in their national development plans. Kenya has pursued trade policies that were aimed at stimulating long term growth since independence. Despite such policies, the current account balance has remained mostly negative for the past 40 years. Therefore, the study investigates the relationship between international trade and economic growth in Kenya for the period 1980-2015 using an Autoregressive Distributed Lag analysis. The study outcome is meant to add value to the empirical evidence on international trade and economic growth nexus. The results derived from the Autoregressive Distributed Lag Bounds test revealed that a long run relationship between international trade (exports and imports) and economic growth exists for the Kenyan economy. The unit root test performed using the Augmented Dickey Fuller test and the Phillip Perron test showed that the variables used in the analysis were all I(1) variables. The results also disclosed that imports and exports are positively and negatively related to economic growth respectively. The VAR Granger causality test on the other hand verified that the export–led growth, export – led import growth and the export led growth hypotheses hold for the Kenyan case.