A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism: How Does the Central Bank's REPO Rate Affect the Economy?, Issues 2006-2300
International Monetary Fund, 2006 - Banks and banking, Central - 26 pages
Annotation 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.
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A VAR Model for Kenya
Economic Interpretations of the Econometric Results
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0.01 Horizon months 1999 Sample Starting 95 percent confidence Bank of Kenya benchmark model broken lines show CBK's REPO rate Central Bank commodity price index Contributions of Monetary derived by bootstrapping dotted and broken econometric results effective exchange rate equation Estimation Period exchange rate NEER exogenous rise Figure fluctuations Forecast Error Variance high interest rate Identification Scheme IMF staff estimates impulse responses Interbank Rate interest rate account interest rate tends January 1997-June Kenya and IMF Kenyan economy lag operator low interest rate mechanism of monetary monetary policy shock monetary policy stance monetary shock monetary transmission mechanism money stock nominal appreciation nominal effective exchange nominal exchange rate nominal short-term interest Non-Recursive Structural Open Market Operations p-values paper percent confidence band real interest rates reduced-form Repurchase Agreement short-term interest rate show the 95 sluggish Source Starting in 1997 Starting in 2000 structural breaks stylized facts temporary rise vector autoregression