Assessing the effectiveness of monetary policy in Kenya: Evidence from a macroeconomic model

Maureen Were, Esman Nyamongo, Anne W. Kamau, Moses M. Sichei and Joseph Wambua

Economic Modelling, 2014, vol. 37, issue C, 193-201

Abstract: This paper examines the effectiveness of monetary policy in Kenya based on policy simulations from a structural macroeconometric model. The analysis is conducted using the policy rate, i.e. the central bank rate (CBR) and the cash reserve ratio (CRR) with respect to the interest rate and bank lending channels, respectively. The results indicate that whereas a change in the policy rate is effective in influencing short term rates, the long term lending rates respond marginally. Consequently, the transmission to the real economy and the overall impact on inflation is minimal. However, a change in CBR has a comparatively higher impact on inflation while a change in CRR has a relatively larger impact on aggregate demand. Enhancing the effectiveness of the CBR and strengthening of the interest rate channel have the potential of anchoring inflation expectations and boosting the effectiveness of monetary policy in Kenya.

Keywords: Macroeconometric model; Monetary policy; Policy simulation; Kenya (search for similar items in EconPapers)
JEL-codes: C54 E27 E52 E59 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:37:y:2014:i:c:p:193-201

DOI: 10.1016/j.econmod.2013.11.004

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