Effectiveness of Monetary Policy in Kenya

Abstract

Despite the central financial role, Kenya plays in the East-African economies, Cheng (2006) notes that, there is scanty information to validate the monetary policy effectiveness. The article aims to unravel the kind of monetary policy Kenya pursues and identify the effective policy instruments and their effects. Quarterly time series data covering the years 2000 (2000:1) to 2014 (2014:1) were used. The empirical results reveal that; - interest rates have no significant long-run or short-run effects on both output and inflation; real money demand and reserves have short-run, but no long run effects; asset prices, deposit rates and lending rates have no short run but have long run effects. The exchange rate and domestic credit have both short run and long run effects even though domestic credit has no significant long run effects on inflation.

Keywords: Kenya’s monetary policy, ARDL Model, Impulse Responses, Variance Decomposition