Effectiveness of the Monetary Policy

Topics: Inflation, Monetary policy, Central bank Pages: 28 (8927 words) Published: February 17, 2014
Various studies have reflected the existence of a positive relationship between the increase of money supply and the level of inflation. Generally, this is reflected by the continued rise of prices of the various products. A situation ensues where excess amounts of money tend to be chasing too few goods. In this perspective, this study tested on whether monetary policy is an effective tool in the combating of inflation. The data utilized was derived from Kenya’s economic situations over a range of years. The period in perspective was that between the years 2001 and 2010. During this period, Kenya faced various catastrophic economic events. Some instances of political instabilities, depressions, and economic recessions were vividly witnessed. In addition, the level of inflation was at an all-time high. During this duration, various monetary policies and tools were utilized by the Central Bank of Kenya. As such, this range was most suitable for this research. The research used ordinary least square model (regression model) in the endeavor. The research found out the money supply has a direct impact on the level of inflation. Statistically, money supply has a statistical significance on the level of inflation in the country. Thus, monetary policies aimed at controlling the amount of money supply in the economy, have a tremendous impact on controlling the level of inflation.

ABBREVIATIONS
M - MONEY SUPPLY
P - PRICE
USD - UNITED STATES DOLLAR
T - TRANSACTIONS
CBK -CENTRAL BANK OF KENYA
GDP - GROSS DOMESTIC PRODUCT
IT - INFLATION TARGETTING
V -VELOCITY OF CIRCULATION
BOP -BALANCE OF PAYMENTS
CPI -CONSUMER PRICE INDEX


Contents
1.0 CHAPTER I1
1.1 Introduction1
1.2 Background Analysis2
1.2.1 Monetary Policy Instruments6
1.2.1.1 Interest rate policy6
1.2.1.2 Minimum liquidity asset ration6
1.2.1.3 Open Market Operations6
1.2.1.4 Selective Credit Control7
1.2.1.5 Inflation Targeting7
1.2.2 Failure of Monetary Policy in Developing Countries8
1.3 Problem Statement10
1.4 Purpose10
1.5 Research Questions11
1.6 Objectives of the Study11
1.7 Significance of the Study12
1.8 limitations12
CHAPTER II13
2.0 Literature Review13
2.1 Introduction13
2.1.1 The Classical Quantity Theory of Money13
2.1.2 Keynesian theory14
2.1.3 The Monetarist Policy Theory14
2.3 Specific Literature15
2.2 General Literature17
3.0 CHAPTER III: Research Methodology20
3.1 Introduction20
3.2 Research Design20
3.3 Model Specifications20
3.4 Definition and Measurement of Variables21
3.5 Study Area21
3.6 Ethical Consideration22
3.7 Target Population22
3.8 Data type and source22
3.9 Data collection22
3.10 Data cleaning, coding, editing, refining and inputting22 3.11 Data analysis23
CHAPTER IV: DATA ANALYSIS AND PRESENTATION23
4.1 Descriptive Statistics23
4.2 Substantive Objectives29
4.2.1 To establish the relationship between money supply and inflation.29 4.2.2 To find out the effectiveness of monetary policy in combating inflation.30 4.3 Data Analysis and Interpretation30

CHAPTER V: SUMMARY AND RECOMMENDATIONS33
5.1 Summary33
5.2 Conclusion33
5.3 Recommendations34
5.4 Further Research35
Bibliography36
APPENDIX A: Data Capture Template39

1.0 CHAPTER I
1.1 Introduction
Since time immemorial, inflation has always been an issue of extreme sensitivity. This accrues to the fact that a case of inflation has overall effect on the prices of commodities. An instance of spiraling, uncontrollable inflation is usually a sign of impending catastrophic doom. Thus, the control of monetary policy has turned out to be an essential function of all governments in the world. Inflation does not necessarily have to be reflected a continued increase in the prices of commodities (hyperinflation), the vice versa can also be a reflection of inflation (deflation). However, both situations are more than unhealthy for the economy. In most economic situations,...

Bibliography: Ball, L., & Sheridan. (2008). Does Inflation Targeting Matter? The Inflation Targeting Debate. In W. M, & B. S. Bernanke, Inflation Targeting: Lessons from the International Experience (pp. 249-276). New Jersey: Princeton University Press.
Bernanke, B. S., & Woodford, M. (1997). Inflation Forecasting and Monetary Policy. Journal of Money, Credit and Banking, 29,653-684.
Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen , A. S. (1999). Inflation Targeting: Lessons from the International Experience. Princeton University Press: New Jersey.
Gichuki, J., Oduor, J., & Kosimbei, G. (2012). THE CHOICE OF OPTIMAL MONETARY POLICY INSTRUMENT FOR KENYA. International Journal of Economics and Management Sciences, 1, 23.
Government of Kenya. (2005, March 18). Inflation Outlook and Monetary Policy. The Kenya Gazette, pp. 506-509.
Heintz, J., & Ndikumana, L. (2010). Is there a case for formal inflation targeting in sub-Saharan Africa. Accra: African Development Bank Group.
IndexMundi. (2012). Kenya Inflation Rate (Consumer Prices). Retrieved October 14, 2012, from Index Mundi: http://www.indexmundi.com/kenya/inflation_rate_ percent28consumer_prices percent29.html
International Monetary Fund
Kenya Economic Statistics and Indicators. (2012). Retrieved October 14, 2012, from Economy Watch: http://www.economywatch.com/economic-statistics/country/Kenya/
Mudida, R
Nadal, D. F. (2001). Inflation Targeters in Practice, A lucky lot? Contemporary Economic Policy. Contemporary Economic Policy, 239-253.
Ndung 'u, N., Adam, C., Maturu, B., & O 'Connel, S. (2010, April). Building a Kenyan Monetary Regime for the 21st Century. Nairobi: Central Bank of Kenya.
Rotich, H., Kathanje, M., & Maana, I. (2007). A MONETARY POLICY REACTION FUNCTION FOR KENYA. Nairobi: Central Bank of Kenya.
The Central Bank of Kenya. (2012). Monetary Policy. Retrieved from Central Bank of Kenya: http://www.centralbank.go.ke/index.php/monetary-policy
APPENDIX A: Data Capture Template
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