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Financial Innovations and Monetary Policy in Kenya

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  • Nyamongo, Esman
  • Ndirangu, Lydia Ndirangu2
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    Abstract

    The objective of this study is to analyze the effects of financial innovation in the banking sector on the conduct of monetary policy in Kenya during 1998-2012. The country has witnessed a number of financial innovations during this period. The study focuses on whether these wave of financial innovations have impacted on the transmission mechanism of monetary policy, and if so how. The results show that the innovations have improved the monetary policy environment in Kenya as the proportion of the unbanked population has declined coupled with gradual reduction in currency outside banks. However, the period post 2007 when the country has experienced the fastest pace of financial innovation, is associated with instability in the money multiplier, income velocity of money and the money demand. However, recent trends point towards stabilization pointing to the need for further examination establish whether indeed the break in trend is of structural or transitory in nature. A structural break raises questions on the credibility of the current monetary targeting framework in use in Kenya, in view of which a more flexible framework should be adopted. Overall, the results show that financial innovation has had positive outcomes and seems to improve the interestrate channel of monetary policy transmission.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52387.

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    Date of creation: Dec 2013
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    Handle: RePEc:pra:mprapa:52387

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    Keywords: Monetary policy; excess liquidity; Kenya; financial innovation;

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    1. Friedman, Benjamin M, 1999. "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance, Wiley Blackwell, vol. 2(3), pages 321-38, November.
    2. Viren, Matti, 1992. "Financial Innovations and Currency Demand: Some New Evidence," Empirical Economics, Springer, vol. 17(4), pages 451-61.
    3. Roseline Nyakerario Misati & Esman Morekwa Nyamongo, 2012. "Asset prices and monetary policy in Kenya," Journal of Economic Studies, Emerald Group Publishing, vol. 39(4), pages 451-468, December.
    4. Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
    5. Nick Hughes & Susie Lonie, 2007. "M-PESA: Mobile Money for the "Unbanked" Turning Cellphones into 24-Hour Tellers in Kenya," Innovations: Technology, Governance, Globalization, MIT Press, vol. 2(1-2), pages 63-81, April.
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