A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism: How Does the Central Bank's REPO Rate Affect the Economy?

Cheng, Kevin

doi:10.5089/9781451865608.001

Cited by 36 publications

(37 citation statements)

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“…The first two equations suggest that output and consumer prices are sluggish in responding to shocks to monetary variables in the economy. This scheme is based on the observation that most types of real economic activity may respond only with a lag to monetary variables because of inherent inertia and planning delays (Bernanke and Mihov, 1997; Karame and Olmedo, 2002; Becklemans, 2005; Vonnak, 2005; Cheng, 2006).…”

Section: Methodsmentioning

confidence: 99%

“…Becklemans (2005) uses a real trade‐weighted exchange rate index in a study of Australia and assumes that the index responds instantaneously to all variables in the system. In a study of Kenya, Cheng (2006) employs a nominal effective exchange rate and maintains that the exchange rate responds contemporaneously to all variables in the SVAR. Similarly, Borys and Hovarth (2007) in a study of the Czech Republic and Piffanelli (2001) in a study of Germany assume all variables in the system affect exchange rates instantaneously.…”

Section: Methodsmentioning

confidence: 99%

“…This presents a case for interpolation. Several studies have used interpolated monthly GDP series in SVARs (see, for example, Cheng, 2006; Borys and Hovarth, 2007). This study employs the Friedman method of interpolating time series by related series to compute the required monthly GDP series from annual data.…”

Section: Methodsmentioning

confidence: 99%

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Dynamic Effects of Monetary Policy Shocks in Malawi

Ngalawa

Viegi

2011

South African J Economics

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This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country's monetary transmission process. In the post-1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened, and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.

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Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

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Dynamic Effects of Monetary Policy Shocks in Malawi

Ngalawa

Viegi

2011

South African J Economics

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“…For example, in Kenya, which maintained a managed float during the sample period, Cheng (2006) used VAR techniques to find that policy-driven interest rates had a considerable impact on the foreign exchange value of the shilling. He found that the exchange rate channel accounted for about one-fourth of the variation in inflation, but suggested that the effect operated mostly through pass-through rather than expenditure-switching effects, since he found much weaker effects on real aggregate demand and economic activity.…”

Section: The Exchange Rate Channelmentioning

confidence: 99%

How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence

Mishra

Montiel

2012

IMF Working Papers

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This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.

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“…Thus, the relationship between the reduced form errors and the disturbances become lower triangular. As in Cheng (2006), a non-fuel world commodity price index (Comm) and a world fuel price index (Oil) are used as exogenous variables to control for external shocks in the constant parameter VAR estimation. A wage index (wages) is also used to capture the impact of externally driven supply side factors that have driven structural breaks in South Africa over the sample period.…”

Section: Resultsmentioning

confidence: 99%

The impact of monetary policy on household consumption in South Africa: Evidence from vector autoregressive techniques

Owusu-Sekyere

2017

SAJEMS

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Background: This article adds to scarce sub-Saharan African and South African literature on monetary policy transmission mechanisms by looking into: (1) the Keynesian interest rate channel of monetary policy transmission in South Africa, focussing on the behaviour of household credit and household consumption; (2) using the time-varying parameter vector autoregressive (VAR) techniques with stochastic volatility to capture the time-varying nature of the underlying structure of the South African economy to see whether it performs better than the constant parameter VAR in so doing and (3) policy implications emerging from the findings of the study.Aim: In testing the hypotheses of the interest rate channel of monetary policy transmission, the aim is to see how household credit and ultimately household consumption have evolved in South Africa: (1) before inflation targeting (1994–1999), (2) after inflation targeting (2000–2007) and (3) during the global financial crisis (2007–2012) in response to different monetary policy positioning.Setting: We focus on three periods: post transition from apartheid, during inflation targeting and during the global financial crisis, periods which saw changes in the monetary policy stance in South Africa.Methods: Quarterly data from 1994Q1 to 2012Q4, constant parameter VAR and time-varying parameter vector autoregressive (TVP-VAR) techniques are used in this study. The use of the TVP-VAR is to capture the time-varying nature of the underlying structure of the South African economy and also to investigate whether it performs better than the constant parameter VAR in so doing.Results: The results show that household credit and consumption declined and stayed negative post transition and after inflation targeting – periods of monetary tightening in South Africa - but increased during the global financial crisis, which saw expansionary monetary policy measures aimed at mitigating the negative output gap in South Africa.Conclusion: These changes in household credit and consumption across the different time periods show evidence of the cost of credit effect of monetary policy on household consumption in South Africa. They further reflect the impact of different structural changes and exogenous shocks on monetary policy conduct in South Africa and its pass through effect on household consumption in South Africa. We further conclude that the time TVP-VAR with stochastic volatility performs better than the constant parameter VAR in capturing the time-varying nature of the underlying structure of the South African economy.

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A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism: How Does the Central Bank's REPO Rate Affect the Economy?

Cited by 36 publications

References 10 publications

Dynamic Effects of Monetary Policy Shocks in Malawi

Dynamic Effects of Monetary Policy Shocks in Malawi

How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence

The impact of monetary policy on household consumption in South Africa: Evidence from vector autoregressive techniques

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