| dc.description.abstract | This study sought to establish the relationship between Monetary Policy and GDP in
Kenya. GDP no doubt is affected by the Monetary Policy of the state. Among the monetary
policies that the CBK adopts in intervening the Kenyan economy, Open Market Operation
is the one which is most frequently used due to its easily observable effect and relatively
low cost during operation. Via buying and selling treasuries the C.B.K adjusts the money
supply in the market and manipulates the economy. In recent years, a modern practice of
this policy is used by the CBK which targets the money market funds rate to control the
money supply. The research papers of various authors have been studied in this regard to
prove the Hypothesis and after in depth analysis by applying Regression Analysis
technique it has been observed that the relationship between the two exists. The data of
past 10 years of Kenya has been used for driving the conclusion. The study proved that the
Growth in Money Supply greatly affects the GDP of an economy, obviously various
unknown factors also affects the GDP.
This research shows that Monetary Policy has a Positive relationship with GDP although
the relationship is not that significant. This positive relationship can be explained by the
fact that the level of Money Supply in the economy influences the purchasing power of
firms, Individuals and also the Expenditure of the Government. The research further shows
that the Rate of Growth of Labour, EXPO, Government Expenditure and Aggregate
Investment also do not have a significant determinant on the rate of growth of GDP. In
addition, Money Supply the variable of interest was found not to be a significant
determinant of GDP in Kenya this is because there are structural weaknesses in the
financial sector such as weak legal framework, poor governance, and insufficient
infrastructure, which have contributed to high interest rate spreads, inadequate financial
intermediation and heightened risks and therefore hamper the transmission mechanism of
monetary policy. This is also because when the CBK is targeting a certain interest rate
(repo rate) to control the money Supply it is the GDP that influences the level of Money
Supply in circulation and not Money Supply affecting the output. | en |
