Modelling the optimal growth- maximizing public debt threshold: A case for Kenya

Abstract

This paper attempts to estimate the optimal growth -maximizing public debt threshold for Kenya by assessing the relationship between public debt and economic growth. The analysis determines the tipping point beyond which Kenya's economic growth would be adversely affected. The paper thus contributes to the debate in Kenya on whether the move by government to take up huge bilateral and multilateral debt will in the long run be detrimental to the economy. A bilateral quadratic equation is used to fit the non - linear relationship. The results confirm existence of a concave relationship between public debt and economic growth which is estimated to be optimal at around 45 to 50 percent for Kenya. The policy implication for the analysis· is the need to ensure that public debt management policies are in line with the growth - maximizing public debt threshold. This will ensure sustained economic growth and employment rates, which are key tenets for sustainable economic development.