The Moderating effect of interest rates rate on the effect of public debt on economic growth

Abstract

Public debt is a critical component influencing economic growth in any country, including Kenya. The effect of national public debt on economic growth in Kenya with a specific focus on how interest rates moderate this relationship. This analysis uses time series data from 2010 to 2023 and includes various lag structures to account for delayed effects of public debt and interest rates on economic growth. While the government has initiated fiscal reforms in order to increase private investments and therefore reduce unemployment, the constant rise of public debt has raised concerns owing to impacts on debt-service and fiscal policy. This research employs secondary time-series data sourced from the World Bank, Kenya National Bureau of Statistics, and the Central Bank of Kenya. The interest rates, exchange rate volatility, Domestic and external debts will be tested on the key economic indicators using the Autoregressive distributed lag (ARDL) model, which is suitable both in the short and the long run. Descriptive statistics will be used to condense the data collected while correlation and regression analyses will be used to establish the extent of these relationships. This research will therefore endeavor to fill this gap by coming up with a more elaborate understanding of the nature and impact of public debt while analyzing the moderating effect of interest rates through interaction terms on the economic growth of Kenya. It may be valuable for policymakers and various market players in deciding on fiscal and debt management measures.

Keywords: public debt, interest rates, economic growth, Kenya, domestic debt, external debt, debt servicing, fiscal policy