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

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Listed:
  • Were, Maureen
  • Nyamongo, Esman
  • Kamau, Anne W.
  • Sichei, Moses M.
  • Wambua, Joseph

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:193-201
    DOI: 10.1016/j.econmod.2013.11.004
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    References listed on IDEAS

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    1. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
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    More about this item

    Keywords

    Macroeconometric model; Monetary policy; Policy simulation; Kenya;

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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