The Effectiveness of Kenya's monetary policy during the period 1967 -1976

Abstract

Monetary policy like Fiscal policy is one of the Public interventionary measures aimed at influencing the level and pattern of economic activity so as to achieve certain desired targets. The ability of the monetary authority of influence the economic performance depends on the financial structure of the economy. It has been argued that wlth a rudimentary financial structure where money and capital Markets are very thin or non-existent changes in money apply cannot be trasmitted onto the real sector and a reorganization of the financial system is required for the smooth functioning of monetary policy. On examining the financial structure of the L.D.C's we find a rudimentary financial system with imperfect capital markets and thus wonder if monetary policy would have any role to play in the process of economic development. However there is a second approach which does not emphasize the institutional aspect of the financial structure and sees the major financial problem in the L.D.C's as that of Credit allocation amongst the various sectors of the economy that the monetary policy has in the past favoured the modern sector at the expense of the priority sectors, especially those in the rural areas, this approach calls for an increasing proportion of credit to the priority sectors as defined in the government's policy goals. The Central Bank of Kenya has pursued both direct and indirect methods of controlling the volume and allocation of credit to the various sectors of the economy with special consideration to the priority sectors. This study has examined the ability of the Central Bank in currying out its policy measures aimed at influencing economic performance. The emphasis has been on how successful to the Central Bank's measures can be especially when some of them have no legal backing and depend on morallsuasion for their implementation was found that on the whole the Central Bank is able to determine the direction of the desired changes but not the definite targets. The Central Bank needs to be more specific in its direct policies if the required targets are to be achieved.