2024, Vol. 9, Issue 5, Part B

This study investigates the relationship between economic growth and fiscal decentralization considering the expenditure perspective using the vector error correction model (ECM) framework. The study also accounts for domestic credit, public debt, manufacturing output, and money supply. Unit root test is performed to determine the variable’s integration order. Fiscal decentralization, domestic credit and economic growth are variables of integrated order one. A cointegration test is then performed to test for cointegration relationship. There exist a cointegration relation among economic growth, domestic credit and fiscal decentralization. There is a significant error correction term that is relatively low in the short term. In the long run, fiscal decentralization has a significant positive effect on economic growth. Finally, the Granger causality test is performed to determine the direction of the causal link. There exists a unidirectional causal flow from fiscal decentralization to economic growth. The introduction of devolved government unit as established by Kenya’s 2010 constitution has led to significant growth in economy development. There is therefore need to strengthen tax and monetary policies that will strengthen the new two-tier government structure.