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A VAR Analysis of Kenya’s Monetary Policy Transmission Mechanism; How Does the Central Bank’s REPO Rate Affect the Economy?

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  • Kevin C Cheng

Abstract

This paper examines the impact of a monetary policy shock on output, prices, and the nominal effective exchange rate for Kenya using data during 1997–2005. Based on techniques commonly used in the vector autoregression literature, the main results suggest that an exogenous increase in the short-term interest rate tends to be followed by a decline in prices and appreciation in the nominal exchange rate, but has insignificant impact on output. Moreover, the paper finds that variations in the short-term interest rate account for significant fluctuations in the nominal exchange rate and prices, while accounting little for output fluctuations.

Suggested Citation

  • 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.
  • Handle: RePEc:imf:imfwpa:06/300
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    References listed on IDEAS

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    1. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    2. Magnus Saxegaard, 2006. "Excess Liquidity and Effectiveness of Monetary Policy; Evidence from Sub-Saharan Africa," IMF Working Papers 06/115, International Monetary Fund.
    3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    4. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
    5. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
    6. Durevall, Dick & Ndung'u, Njuguna S., 1998. "A Dynamic Model of Inflation for Kenya 1974 - 1996," Working Papers in Economics 7, University of Gothenburg, Department of Economics.
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    Cited by:

    1. Kronick, Jeremy, 2015. "Do Loan-to-Value Ratio Regulation Changes Affect Canadian Mortgage Credit?," MPRA Paper 73671, University Library of Munich, Germany.
    2. Adebayo Augustine Kutu & Harold Ngalawa, 2016. "Monetary Policy Shocks And Industrial Output In Brics Countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(3), pages 3-24, July-Sept.
    3. Mengesha, Lula G. & Holmes, Mark J., 2013. "Monetary policy and its transmission mechanisms in Eritrea," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 766-780.
    4. Mishra, Prachi & Montiel, Peter, 2013. "How effective is monetary transmission in low-income countries? A survey of the empirical evidence," Economic Systems, Elsevier, vol. 37(2), pages 187-216.
    5. 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.
    6. Nyorekwa, Enock Twinoburyo & Odhiambo, Nicholas Mbaya, 2016. "Can monetary policy drive economic growth? empirical evidence from Tanzania," Working Papers 21122, University of South Africa, Department of Economics.
    7. Thanabalasingam Vinayagathasan, 2014. "Monetary policy and the real economy: A structural VAR approach for Sri Lanka," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 4(1), pages 41-64, January.

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