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

  • Roseline Nyakerario Misati
  • Esman Morekwa Nyamongo
  • Lucas Kamau Njoroge
  • Sheila Kaminchia
Registered author(s):

    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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    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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    3. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    4. Otmar Issing, 2011. "Lessons for Monetary Policy; What Should the Consensus Be?," IMF Working Papers 11/97, International Monetary Fund.
    5. Farzanegan, Mohammad Reza & Markwardt, Gunther, 2008. "The effects of oil price shocks on the Iranian economy," Dresden Discussion Paper Series in Economics 15/08, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
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    8. Hoffman, Dennis L & Rasche, Robert H, 1996. "Assessing Forecast Performance in a Cointegrated System," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 495-517, Sept.-Oct.
    9. Brash, D., 1998. "Inflation Targeting in New Zealand: Experience and Practice," Papers 641, Stockholm - International Economic Studies.
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    11. Hiroyuki Taguchi & Chizuru Kato, 2010. "Assessing the Performance of Inflation Targeting in East Asian economies," Macroeconomics Working Papers 23078, East Asian Bureau of Economic Research.
    12. Francesco Furlanetto, 2011. "Does Monetary Policy React to Asset Prices? Some International Evidence," International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 91-111, September.
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    14. Alvaro Angeriz & Philip Arestis, 2007. "Assessing Inflation Targeting Through Intervention Analysis," Money Macro and Finance (MMF) Research Group Conference 2006 87, Money Macro and Finance Research Group.
    15. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    16. James Heintz & Léonce Ndikumana, 2010. "Is There a Case for Formal Inflation Targeting in Sub-Saharan Africa?," Working Papers wp218, Political Economy Research Institute, University of Massachusetts at Amherst.
    17. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
    18. Piti Disyatat, 2005. "Inflation targeting, asset prices and financial imbalances: conceptualizing the debate," BIS Working Papers 168, Bank for International Settlements.
    19. Gauti B. Eggertsson & Eric Le Borgne, 2010. "A Political Agency Theory of Central Bank Independence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 647-677, 06.
    20. 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.
    21. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    22. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
    23. Dr Don Brash, 2002. "Inflation targeting 14 years on," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March.
    24. 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.
    25. Atsuyuki Naka & David Tufte, 1997. "Examining impulse response functions in cointegrated systems," Applied Economics, Taylor & Francis Journals, vol. 29(12), pages 1593-1603.
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