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A Dynamic Model of Inflation for Kenya, 1974–1996

Author

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  • Njuguna S. Ndung'u
  • Dick Durevall

Abstract

This paper analyses the dynamics of inflation in Kenya during 1974–96, a period characterized by external shocks and internal disequilibria. By developing a parsimonious and empirically constant error correction model the paper finds that the exchange rate, foreign prices, and terms of trade have long-run effects on inflation, while the money supply and interest rate only have short-run effects. The dynamics of inflation are also found to be influenced by food supply constraints. Moreover, inertia is important for the period up to 1993, when about 40 percent of current inflation was transmitted to the next quarter. After 1993 inertia drops to about 10 percent.

Suggested Citation

  • Njuguna S. Ndung'u & Dick Durevall, 1999. "A Dynamic Model of Inflation for Kenya, 1974–1996," IMF Working Papers 99/97, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:99/97
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    Cited by:

    1. Asghar Shahmoradi & Hamed Shakouri, 2010. "Investigation on the Impact of an Energy Desubsidization Shock on the General Price Index Via a Nonlinear Inflation Model: Case of Iran," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 15(3), pages 33-51, fall.
    2. Lekgatlhamang Setlhare, 2004. "Bank Of Botswana'S Reaction Function: Modelling Botswana'S Monetary Policy Strategy," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 384-406, June.
    3. Loening, Josef L. & Durevall, Dick & Ayalew Birru, Yohannes, 2009. "Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia," Working Papers in Economics 347, University of Gothenburg, Department of Economics.
    4. Moses C. Kiptui, 2014. "Some Empirical Evidence on the Stability of Money Demand in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 849-858.
    5. Nandwa, B., 2006. "Implication of the Taylor Rule on Real Exchange Rate Movement in Kenya," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
    6. Durevall, Dick & Loening, Josef L. & Ayalew Birru, Yohannes, 2013. "Inflation dynamics and food prices in Ethiopia," Journal of Development Economics, Elsevier, vol. 104(C), pages 89-106.
    7. Bacchetta, Marc & Jansen, Marion, 2003. "Adjusting to trade liberalization: The role of policy, institutions and WTO Disciplines," WTO Special Studies, World Trade Organization (WTO), Economic Research and Statistics Division, volume 7, number 7.
    8. 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.
    9. LOENING, Josef & TAKADA, Hideki, 2008. "Inflationary Expectations In Ethiopia: Some Preliminary Results," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(2), pages 159-176.
    10. Misati, Roseline Nyakerario & Munene, Olive, 2015. "Second Round Effects And Pass-Through Of Food Prices To Inflation In Kenya," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 3(3), pages 1-13, July.

    More about this item

    Keywords

    Demand for money; Kenya; Inflation; Inertia; Money demand; Food supply; Real exchange rate; Terms of Trade; Cointegration; Error Correction Model; money supply; foreign exchange; price inflation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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