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Feasibility of inflation targeting in an emerging market: evidence from Kenya

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  • Roseline Nyakerario Misati
  • Esman Morekwa Nyamongo
  • Lucas Kamau Njoroge
  • Sheila Kaminchia
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    Abstract

    Purpose – The purpose of this paper is to assess the suitability of adopting inflation targeting in an emerging market, based on the pre-conditions of inflation targeting identified in the literature. Design/methodology/approach – The study uses Granger causality and VAR approaches to assess the importance of the relationship between monetary policy variables and inflation. Findings – The findings indicate a dominant role of fiscal policy on both prices and output. The results therefore support the fiscal theory of price level, implying a need for incorporation of a fiscal variable in the design of monetary policy. The study also observes that the employment contract of the office of the governor is relatively short-term and less than the Kenyan election cycle. The exchange rate is found to have no role on both prices and output. More importantly, the results show that the Kenyan economy does not meet all the conditions necessary for adopting inflation targeting. Originality/value – The study described in the paper is novel, as it is the first attempt the authors are aware of that empirically assesses the feasibility of inflation targeting in Kenya. The paper provides policy makers in emerging markets with useful information on the choice of appropriate policy frameworks for maintaining price stability. It also demonstrates the need for evaluation of any policy framework before adoption. JEL classification: E5, E, E52, E5, E58

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

    Volume (Year): 4 (2012)
    Issue (Month): 2 (June)
    Pages: 146-159

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    Handle: RePEc:eme:jfeppp:v:4:y:2012:i:2:p:146-159

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Emerging markets; Fiscal policy; Inflation; Inflation targeting; Kenya; Monetary policy variables; National economy;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    3. Ankita Mishra & Vinod Mishra, 2009. "Pre-Conditions For Inflation Targeting In An Emerging Economy - The Case Of India," Development Research Unit Working Paper Series 08-09, Monash University, Department of Economics.
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    12. Francesco FURLANETTO, 2008. "Does Monetary Policy React to Asset Prices? Some International Evidence," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 08.02, Université de Lausanne, Faculté des HEC, DEEP.
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    22. Roseline N. Misati & Esman M. Nyamongo & Anne W. Kamau, 2011. "Interest rate pass-through in Kenya," International Journal of Development Issues, Emerald Group Publishing, vol. 10(2), pages 170-182, July.
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