International Journal of Multidisciplinary Research and Modern Education (IJMRME) ISSN (Online): 2454 - 6119 (www.rdmodernresearch.com) Volume II, Issue I, 2016 771 VOLATILITY OF CAPITAL INFLOWS AND THE PUBLIC DEBT LEVELS IN THE EMERGING ECONOMIES Anyango Wicliffe Otieno*, Dr. Agnes Njeru** & Dr. Antony Waititu** * PhD Student, Jomo Kenyatta University of Agriculture and Technology, Kenya ** Senior Lecturer Jomo Kenyatta University of Agriculture and Technology, Kenya Abstract The over-optimism of the developing economies in their fiscal situations has led to the decline in government revenue and an increase on the social expenditure due to factors such as population growth, new costs in the financial systems etc. thus many governments are trying to determine a no risk level of fiscal deficit and public debt in their economies, this is becoming a major issue for example in Kenya as she has experienced the highs of up to 105 shillings for a dollar in October 2015, expunging public debt levels of approximately 4 trillion by June 2016. The government has taken various measures such as relying more on external debt to avoid crowding out private investments and consequently promote economic growth. Despite these efforts, private investments and economic growth have remained low. In Kenya, the debt-to-GDP ratio stands at 46 per cent, the government stands for the argument that investments being made in infrastructure as well as good quality institutions. The studies’ findings revealed that volatility of inflows has a positive influence on monetary policy as a result of the monetary effect elements in Kenya and thus concluding that since it is evident that the Kenyan Economy is classified as EME in economic reality, the liberalization on capital controls has increased the volume of inflows and changed its composition, but has not prevent the depreciation of the currency. It should be noted that, the use of capital controls represents a practical alternative that can allow governments to maintain a stable and competitive exchange rates, while at the same time pursuing a monetary policy that leads to sustainable stability and reasonable levels of inflation. The government needs to control the flow of capital into the economy, since its impact is passed on to other elements and so lack of practicality due to wrong diagnosis, similarly the government should encourage productivity of the economy to enable financial stability that in turn will practically regulate the interest rates, foreign exchange rate, consumer price index and ensure balance of elements such as public debt by encouraging more of domestic borrowing. Key Words: Volatility, Inflows, Public Debt & Emerging Economies Introduction: Public debt is considered one of the main macroeconomic indicators that forms much of a countries’ image in international markets(Abbas & Christensen, 2007). It is one of the inward foreign direct investment flow determinants. Moreover, since governments borrow mainly by issuing securities, their term, interest rates and overall costs of debt financing has significant impact on economy, future of the enterprises and social welfare for not only present, but also future generations. According to(Feldstein & Horioka, 1980), public debt can also serve as means of delaying increase in taxes and in turn reducing economic distortions. Openness to foreign capital flows provides domestic residents with opportunities for diversification and may contribute to investment by reducing the country’s overall cost of capital. It also alters the environment for monetary policy, however, by increasing the degree of de factocapital mobility. One of the central propositions of international monetary economics is that an increase in capital mobility