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A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism

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  • Kevin C. Cheng
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    Abstract

    This paper examines the impact of a monetary policy shock on output, prices, and the nominal effective exchange rate for Kenya using data during 1997–2005. Based on techniques commonly used in the vector autoregression literature, the main results suggest that an exogenous increase in the short-term interest rate tends to be followed by a decline in prices and appreciation in the nominal exchange rate, but has insignificant impact on output. Moreover, the paper finds that variations in the short-term interest rate account for significant fluctuations in the nominal exchange rate and prices, while accounting little for output fluctuations.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/300.

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    Length: 26
    Date of creation: 01 Dec 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/300

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    Keywords: Monetary transmission mechanism; Interest rates; Exchange rates; Prices; Economic models; monetary policy; inflation; money stock; monetary stance; monetary transmission; central bank; monetary shock; monetary fund; money supply; price stability; real interest rates; money demand; real output; tight monetary stance; monetary economics; monetary policy framework; low inflation; monetary instruments; open market operations; nominal variables; monetary policy transmission mechanism; general level of prices; foreign currency; reserve requirements; monetary policy instrument; monetary instrument; high inflation; price level; rate of inflation; money growth; real variables; terms of trade; nominal interest rates; foreign exchange; reserve requirement; real interest rate; monetary policy reaction function; government securities; monetary authorities; monetary aggregates; monetary economy; monetary impact; transmission of monetary policy; high interest rates; monetary expansion;

    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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    1. Durevall, Dick & Ndung'u, Njuguna S., 1998. "A Dynamic Model of Inflation for Kenya 1974 - 1996," Working Papers in Economics 7, University of Gothenburg, Department of Economics.
    2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    3. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
    4. Magnus Saxegaard, 2006. "Excess Liquidity and the Effectiveness of Monetary Policy," IMF Working Papers 06/115, International Monetary Fund.
    5. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    6. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
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    Cited by:
    1. Mishra, Prachi & Montiel, Peter, 2013. "How effective is monetary transmission in low-income countries? A survey of the empirical evidence," Economic Systems, Elsevier, vol. 37(2), pages 187-216.
    2. Were, Maureen & Nyamongo, Esman & Kamau, Anne W. & Sichei, Moses M. & Wambua, Joseph, 2014. "Assessing the effectiveness of monetary policy in Kenya: Evidence from a macroeconomic model," Economic Modelling, Elsevier, vol. 37(C), pages 193-201.
    3. Mengesha, Lula G. & Holmes, Mark J., 2013. "Monetary policy and its transmission mechanisms in Eritrea," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 766-780.

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