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

  • Njuguna S. Ndung'U

    (Department of Economics, University of Nairobi, Kenya)

  • Rose W. Ngugi

    (Department of Economics, University of Nairobi, Kenya)

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    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.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

    Volume (Year): 11 (1999)
    Issue (Month): 3 ()
    Pages: 465-491

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    Handle: RePEc:wly:jintdv:v:11:y:1999:i:3:p:465-491
    Contact details of provider: Web page: http://www3.interscience.wiley.com/journal/5102/home

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    1. 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.
    2. 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 132-51, February.
    3. Reinhart, Carmen & Asea, Patrick, 1995. "Real interest rate differentials and the real exchange rate: Evidence from four African countries," MPRA Paper 13357, University Library of Munich, Germany.
    4. 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 449-59, October.
    5. 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.
    6. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    7. 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.
    8. Chhibber, Ajay, 1991. "Africa's rising inflation : causes, consequences, and cures," Policy Research Working Paper Series 577, The World Bank.
    9. S. H. Axilrod, 1995. "Transformation of Markets and Policy Instruments for Open Market Operations," IMF Working Papers 95/146, International Monetary Fund.
    10. 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 231-71, October.
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