Government Expenditure, Electoral Cycles and Inflation in Kenya, 1990–2024: An ARDL Approach

Abstract

Fiscal policy is one of the most debated tools of government policy for controlling inflation, with consequences that may vary according to political influences arising around elections. This study investigated whether Kenya's electoral cycle affects the relationship between government spending and inflation during 1990–2024. The study further explored whether the electoral cycle moderates the relationship between government spending and inflation over the same period. The study drew on five key theories, while the empirical literature yielded mixed and inconclusive findings across countries; in Kenya, no study had jointly modelled inflation and the electoral cycle within a single interaction-based framework. Using annual secondary data from the World Bank, International Monetary Fund, Kenya National Bureau of Statistics and Central Bank of Kenya, an Autoregressive Distributed Lag model was estimated to examine the effect of government expenditure on inflation with election-year and pre-election-year interaction terms. Unit-root tests, ARDL bounds testing and an Error Correction Model were used to estimate the short- and long-run relationships. The results showed that government expenditure had a significant negative long-run effect on inflation at baseline (β = -1.215, p = 0.004), whereas the election-year interaction was significant and positive (β = 1.641, p = 0.037), making the conditional effect inflationary in election years; the pre-election interaction was positive but not significant (p = 0.129). In view of these findings, the National Treasury should enforce stricter expenditure ceilings and transparent public reporting of election-year spending and strengthen fiscal-monetary policy coordination with the Central Bank of Kenya to curb election-related inflation in Kenya.