A Monetary Model of Exchange Market Pressure Applied to the Kenyan Experience:1967-1990

Abstract

A monetary model within the modern quantity theory tradition(monetarist proposition) is developed which is then used to test the relevance of the monetary approach to the balanceof- payments adjustments using a framework test analysis,the exchange market pressure model on Kenya's experience during the period 1967-1990. The findings of the study revealed that the model was satisfactory and fulfilled the objectives of the study.The estimated model,despite all its imperfections was found to trace the turning points of the exchange market pressure satisfactory, indicating the model to be valid.The general analysis of the estimation results showed that the coefficients had the expected signs and three were found to be significant at the five per cent level of significance.The model gave a reasonably high R2 and F-statistic was highly significant.The model passed the diagnostic test indicating the results to be representative of the data used and the model to be valid. In a nutshell the results of the study supports the monetarist proposition to the balance of payments in Kenya. This result support the findings of Grubel and Ryan (1979). The study found monetary factors to be significant in explaining the exchange market pressure,implying the possibility of conducting stabilization policies through better management of the country's monetary affairs and is supportive of the monetary approach to the balance of payments adjustment,blaming the persistent payments imbalances largely on the excessive expansionary monetary policy. The paper emphasise on the proper domestic management of monetary affairs by the monetary authorities,especially domestic credit creation in their attempts in achieving balance of payments equilibrium.These policies should be accompanied by other measures to ensure smooth adjustment of the country' performance.The weaknesses of the study are also suggested