Monetary Policy Implementation and Volatility Transmission along the Yield Curve: The Case of Kenya
IMF Working Papers, June 20, 2016
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- Monetary Policy Implementation and Volatility Transmission along the Yield Curve: The Case of Kenya
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Bibliographic details
- Authors: Emre Alper, Fan Yang
- Published: June 20, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498313377.001
Summary and research question
- Paper analyzes the degree to which volatility in interbank interest rates leads to volatility in financial instruments with longer maturities (e.g., T-bills) in Kenya since 2012, year in which the monetary policy framework switched to a forward-looking approach.
- Comparison is made relative to seven other inflation targeting (IT) countries: Ghana, Hungary, Poland, South Africa, Sweden, Thailand, and Uganda.
- Authors: Emre Alper, Fan Yang
- Date: June 20, 2016
Key findings
- Kenya shows strong volatility transmission from interbank rates to longer-maturity instruments.
- Kenya exhibits high persistence in yield volatility similar to other countries in transition to a more forward-looking monetary policy framework.
- The results emphasize the importance of a strong commitment to an interbank rate as an operational target.
- Empirical implication: the central bank could reduce uncertainty in short-term yields significantly by smoothing out the overnight interest rates around the policy rate.
Comparative analysis
- Peer group: Ghana, Hungary, Poland, South Africa, Sweden, Thailand, and Uganda.
- Kenya’s pattern of volatility transmission and persistence is described as similar to other countries transitioning to forward-looking monetary policy frameworks.
Policy implications and recommendations
- Maintain a strong commitment to an interbank rate as the operational target for monetary policy implementation.
- Smooth overnight interest rates around the policy rate to reduce uncertainty in short-term yields.
Subject areas and keywords (as provided)
- Subjects: Banking, Central bank policy rate, Financial institutions, Financial services, Interbank rates, Monetary policy, Monetary policy frameworks, Treasury bills and bonds, Yield curve
- Keywords: Africa, Central bank policy rate, Global, headline inflation, inflation expectation, inflation modeling, inflation objective, inflation target range, inflation targeting, interbank market rate, interbank rate, interbank rate corridor, interbank rate series, Interbank rates, interest rate volatility, Kenya, monetary policy Analysis Unit, Monetary policy frameworks, Monetary policy implementation, money market rate, overnight market interest rate, overnight rate, policy rate change, rate, Treasury bills and bonds, volatility transmission, WP, year inflation expectation, Yield curve