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Role of Cbk

In: Business and Management

Submitted By gmwangi
Words 433
Pages 2
4
Using monthly data during 1997–2005, th e paper observes the following
2
:

A temporary exogenous rise in the CBK’s
REPO rate tends to be followed by a decline in prices and appreciation in th e nominal exchange rate, with effects culminating 9–12 months after the incipient shock. The im pact on output appears to be sluggish and small; and

Variations in the short-term interest rate account for ar ound one-third of the fluctuations in prices and half of the fluc tuations in the nominal exchange rate, while accounting for around 10 percen t of the output variation.
The empirical findings suggest a weak transmis sion mechanism from monetary policy stance to real variables, likely refl ecting a slew of structural prob lems in the financial market, including inadequate financial infrastructure and weak lega l framework. On the other hand, there appears to be a strong li nk between monetary policy and nominal variables. A plausible transmission mechanism is as follows: a rise in interest rates associated with a tight monetary stance makes domestic assets more profitable vis-à-vis foreign assets, resulting in capital inflows, thereby exerting appreciating pressure on the exchange rate. Strengthening domestic currency in turn makes imports ch eaper, thereby easing inflation.
This paper is organized as follows: Section
II briefly describes th e institutional background and summarizes stylized facts about the Kenya n monetary economy; Sect ion III presents the econometric framework and discusses the result s and interpretations;
Section IV concludes with policy implications and caveats. The append ix presents a robustness exercise for the analysis in Section III.
II. I
NSTITUTIONAL
B
ACKGROUND AND
S
TYLIZED
F
ACTS
A. The Monetary Policy Framework in Kenya
Objective of the

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