Abstract

In 2016, the Kenyan government capped interest rates to 14% per annum in order to spar investments through cheaper credit acquisition from commercial banks but the levels of investments declined from 21.2% in 2015 to 17% in 2016; however the trend analysis on Gross Capital Formation (GCF), has fluctuated since 1964 through to 2016. The study seeks to investigate this trend through the perspective of real interest rate and GDP fluctuations, adopting the Keynesian hypothesis. Correlational research design and the World Bank Time series data from 1972 to 2016 were used. GARCH (1,1) model was formulated and results indicated that Real Interest Rate (RIR) was insignificant to determine GCF i.e.  ARCH( ; and GARCH term (  were significant while GDP was not significant(  in determining GCF volatility. The conclusion was that RIR internal shocks significantly affected GCF volatility hence real interest rate stability must be enhanced by the policy makers.