Fiscal and Monetary Policy Mix in Kenya: An Empirical Analysis

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University of Dar es Salaam
This study empirically analyzes the monetary and policy mix in Kenya for the period 1996-2017. Monetary and fiscal policy reaction functions are specified in a Markov regime-switching framework and estimated by maximum likelihood method. The results show that the Central Bank of Kenya (CBK) considers inflation, expected inflation, exchange rate and output gap in setting monetary policy. Fiscal authority does not consider debt level in determining the deficit level suggesting that the debt is unsustainable. The results also show that monetary and fiscal policy rules are characterized by regime shifts from active fiscal/passive monetary policies mix prior to 2004 and active monetary/active fiscal policies mix thereafter indicating lack of clear policy coordination. The effect of fiscal deficit on inflation is analyzed using Autoregressive Distributed Lag (ARDL) approach. The results show no evidence of significant effects of fiscal deficit on inflation in Kenya both in the short and long run. This is attributed to the restriction of CBK To finance and prudent monetary policy employed by CBK thereby subduing the deficit-inflation link. Results suggest that inflation in Kenya is mainly driven by the level of economic growth, exchange rate depreciation and the monetary policy stance. This study recommends that the conduct of the monetary and fiscal policy be more coordinated to ensure optimal achievement of their objectives. There is need for the government to cut its expenditures controls and fiscal consolidation to reduce the growing public debt. There is need to strengthen revenue collection, prevent revenue diversion and corruption, and sealing of tax evasion and avoidance loopholes.
Available in print form, Eat Africana Collection, Dr. Wilbert Chagula Library,(THS EAF HJ192.5 K4M373)
Fiscal policy, Monetary policy Management, Finance, Public, Intergovernmental fiscal relations, Economic policy, Kenya
Mathu, M. M.(2019) Fiscal and Monetary Policy Mix in Kenya: An Empirical Analysis. Doctorial dissertation, University of Dar es Salaam, Dar es Salaam.