The Use of Monetary Targeting as a Strategy of Monetary Management in Kenya

Abstract

The purpose of this thesis is to investigate the process and some issues relating to monetary policy practice in Kenya since 1963. The main issues addressed relate to the financial structure in Kenya, monetary targeting, the money supply function and the policy related to the interest rates.

In terms of growth, Kenya's financial system is well-developed, where the linkages between financial institutions and the real sector of the economy are well-established. The essential element in the formulation of a monetary target is the development of co-ordinated packages of non-inflationary government policies of which the target is one component. The targeting of the money supply as an economic strategy follows the emphasis on money as a key macroeconomic variable. The role of interest rates in accelerating economic growth in LDCs has remained an issue of controversy for a long time. Many countries including Kenya have been administering interest rates; in recent times the monetary authorities have decided to free interest rates and allow them to be determined by the market forces.

A single equation money supply model for Kenya is estimated using the Box-Cox method and the data used are annual from 1966 to 1990. Although money supply estimation has been carried out for other countries, this study is novel in that it considers the argument that money supply may be an endogenous variable, but concludes after testing that, while control by the Central Bank is not complete, the money supply can be considered to be exogenously determined