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

Author/Editor:

Kevin C Cheng

Publication Date:

December 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2006/300

Subject:

Monetary base Monetary transmission mechanism Nominal effective exchange rate Short term interest rates Vector autoregression

English

Publication Date:

December 1, 2006

ISBN/ISSN:

9781451865608/1018-5941

Stock No:

WPIEA2006300

Pages:

26

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