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Adjustment and liberalization in Kenya: the financial and foreign exchange markets

Author

Listed:
  • Njuguna S. Ndung'U

    (Department of Economics, University of Nairobi, Kenya)

  • Rose W. Ngugi

    (Department of Economics, University of Nairobi, Kenya)

Abstract

The paper analyses the impact of liberalization on two key and interrelated markets in Kenya, the financial and the foreign exchange markets. It is shown that the inflation profile changes with exchange rate policy, interest rates have not been market determined even after liberalization, interest rate spreads have increased with liberalization, a reflection of inefficiency in the financial market, while foreign and domestic interest rate differential and short-term speculative capital inflows affect the real exchange rate. The policy conflict of targeting a competitive exchange rate and low inflation with interest rate as the only instrument is shown to lead to a policy dilemma and to complicate macroeconomic management in the 1990s in an environment where fiscal adjustment has not taken place. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • Njuguna S. Ndung'U & Rose W. Ngugi, 1999. "Adjustment and liberalization in Kenya: the financial and foreign exchange markets," Journal of International Development, John Wiley & Sons, Ltd., vol. 11(3), pages 465-491.
  • Handle: RePEc:wly:jintdv:v:11:y:1999:i:3:p:465-491
    DOI: 10.1002/(SICI)1099-1328(199905/06)11:3<465::AID-JID595>3.0.CO;2-9
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    References listed on IDEAS

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    1. Asea, Patrick K & Reinhart, Carmen M, 1996. "Le Prix de l'Argent: How (Not) to Deal with Capital Inflows," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 231-271, October.
    2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    3. MacDonald, Ronald & Nagayasu, Jun, 1998. "On the Japanese Yen-U.S. Dollar Exchange Rate: A Structural Econometric Model Based on Real Interest Differentials," Journal of the Japanese and International Economies, Elsevier, vol. 12(1), pages 75-102, March.
    4. Chhibber, Ajay, 1991. "Africa's rising inflation : causes, consequences, and cures," Policy Research Working Paper Series 577, The World Bank.
    5. Blejer, Mario I & Leiderman, Leonardo, 1981. "A Monetary Approach to the Crawling-Peg System: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 132-151, February.
    6. D. F. I. Folkerts-Landau & Donald J Mathieson & Morris Goldstein & Liliana Rojas-Suárez & José Saúl Lizondo & Timothy D. Lane, 1991. "Determinants and Systemic Consequences of International Capital Flows," IMF Occasional Papers 77, International Monetary Fund.
    7. Pantula, Sastry G & Gonzalez-Farias, Graciela & Fuller, Wayne A, 1994. "A Comparison of Unit-Root Test Criteria," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 449-459, October.
    8. S. H. Axilrod, 1995. "Transformation of Markets and Policy Instruments for Open Market Operations," IMF Working Papers 95/146, International Monetary Fund.
    9. Klein, Michael W., 1990. "Macroeconomic aspects of exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 376-387, December.
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    Cited by:

    1. Judith Tyson & Terry McKinley, 2014. "Financialization and the Developing world:Mapping the Issues," Working papers wpaper38, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    2. Kodongo, Odongo & Ojah, Kalu, 2012. "The dynamic relation between foreign exchange rates and international portfolio flows: Evidence from Africa's capital markets," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 71-87.
    3. Kodongo, Odongo & Ojah, Kalu, 2013. "Real exchange rates, trade balance and capital flows in Africa," Journal of Economics and Business, Elsevier, vol. 66(C), pages 22-46.
    4. Robert Pollin & James Heintz, 2007. "Expanding Decent Employment in Kenya: The Role of Monetary Policy, Inflation Control, and the Exchange Rate," Country Study 6, International Policy Centre for Inclusive Growth.

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