The Relationship Between Financial Liberalization and Price Stability in Kenya

Abstract

From the past literature, to liberalize the financial sector when inflation is high can lead to high interest rates and even higher inflation. Thereafter, when inflation is fought, a period of low inflation and high real interest rates follow. Since Kenya experienced this sequence, it appears that prices were unstable before and during the financial liberalization period. The study used the economic growth model and paired correlations to find out whether there exists a relationship between financial liberalization and price stability in Kenya. The study used secondary data to test the relationship between Financial Liberalization and Price Stability in Kenya for the period 1980 to 2010. The findings show that financial liberalization had a positive effect on the rates of inflation. However, although financial liberalization was not exclusively responsible for the fluctuations in the rate of interest as shown by the positive relationship before liberalization the study further established that there is a positive relationship between financial liberalization and inflation levels before and after financial liberalization and therefore, financial liberalization has a positive effect on the price stability in Kenya