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EFFECTS OF MONETARY POLICY ON ECONOMIC GROWTH IN KENYA

 

Reynold Njue Nyaga

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya.

Corresponding Author email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

Dr. Kepha Ombui

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

 

Prof. Mike A. Iravo

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

 

 

CITATION: Nyaga, R. N., Ombui, K., Iravo, M., A. (2017) Effects of Monetary Policy On Economic Growth in Kenya. International Journal of Economics and Finance. Vol. 6 (10) pp

34 – 54.

ABSTRACT

Kenya's Long-term development blueprint places a high premium on macroeconomic stability as one of the key foundations to spur rapid economic growth. To maintain a stable macroeconomic environment, the government uses both monetary and fiscal policies to correct any imbalances within the economy and bring it back to equilibrium. Monetary policy is usually the first line of defense for any government in the event of any imbalance as it does not require any approval from the executive and legislative authorities. It has been used by governments and central banks as an interventionist measure, as a way to influence the level and pattern of economic activity through money supply. The central bank of Kenya formulates and implements monetary policies through various instruments aimed at influencing the quantity, cost and availability of money in the economy with the objective of promoting economic growth, maintaining stable prices & stable exchange rates, attaining full employment and achieve equilibrium in the balance of payments. Even though the central bank of Kenya implements monetary policies aimed at stimulating growth, the country still experiences sluggish economic growth. Kenya’s annual growth rate has averaged 3.73% per annum from1987-2016 which is below the envisioned growth rate of 10% per annum. The broad objective of this study is to determine the effects of monetary policy on economic growth in Kenya. The study makes use of annual time series data from 1987 to 2016 to show the effects of monetary policy on economic growth. The main findings of the study indicated that the use of monetary policy to stimulate growth was positive and significant. Monetary policy instruments such as Treasury bills and Exchange rate policy were both found to have a negative and significant relationship with economic growth. The study found that cash reserve ratio as an instrument of monetary policy has direct and significant relationship with economic growth. The study recommends that the central bank of Kenya should use monetary policy in to intervene in the economy in case of any shocks (internal and external) that may cause an imbalance in the economy to stimulate growth but this should be complimented by other policies so as to promote growth in the long run. It also found that treasury bills, exchange rate and cash reserve ratio are viable monetary policy instruments that can used to either increase or reduce money supply in the economy.

Key words: Broad Money Supply, Treasury Bill Rate, Exchange Rate, Cash Reserve Requirement, Economic Growth

 

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