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Assessing the effectiveness of monetary policy in Kenya: Evidence from a macroeconomic model

  • Were, Maureen
  • Nyamongo, Esman
  • Kamau, Anne W.
  • Sichei, Moses M.
  • Wambua, Joseph
Registered author(s):

    This paper examines the effectiveness of monetary policy in Kenya based on policy simulations from a structural macroeconometric model. The analysis is conducted using the policy rate, i.e. the central bank rate (CBR) and the cash reserve ratio (CRR) with respect to the interest rate and bank lending channels, respectively. The results indicate that whereas a change in the policy rate is effective in influencing short term rates, the long term lending rates respond marginally. Consequently, the transmission to the real economy and the overall impact on inflation is minimal. However, a change in CBR has a comparatively higher impact on inflation while a change in CRR has a relatively larger impact on aggregate demand. Enhancing the effectiveness of the CBR and strengthening of the interest rate channel have the potential of anchoring inflation expectations and boosting the effectiveness of monetary policy in Kenya.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999313004872
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 37 (2014)
    Issue (Month): C ()
    Pages: 193-201

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    Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:193-201
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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    1. By James Morsink & Tamim Bayoumi, 2001. "A Peek Inside the Black Box: The Monetary Transmission Mechanism in Japan," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 2.
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    4. Kevin C. Cheng, 2006. "A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism; How Does the Central Bank's REPO Rate Affect the Economy?," IMF Working Papers 06/300, International Monetary Fund.
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    9. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
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    11. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
    12. Peter N. Ireland, 2005. "The Monetary Transmission Mechanism," Boston College Working Papers in Economics 628, Boston College Department of Economics.
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    16. Ivrendi, Mehmet & Guloglu, Bulent, 2010. "Monetary shocks, exchange rates and trade balances: Evidence from inflation targeting countries," Economic Modelling, Elsevier, vol. 27(5), pages 1144-1155, September.
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