The Relationship Between Interest Rate And Inflation Rate In Kenya
Abstract
In this study the relationship between nominal interest and expected inflation in Kenya is
investigated. Monthly data for the interbank rate (IBR) and the inflation rate (INF) calculated
from CPI for the period between 2003 and 2016 is used. The regression model, Granger causality
and ARDL model are the empirical tasks conducted to investigate the relationship. Regression
model and Granger causality test show supporting evidence of relationship between the
variables. Granger causality Wald test and the ARDL model show that there is causality from
INF to IBR and not vice versa. The ARDL(1,0) model fitted show evidence of partial adjustment
of IBR for changes in the INF. Hence monetary authorities may, with precaution, use marginal
changes in nominal interest to combat inflationary pressure. Nominal Interest rate may not
respond fully to inflation expectation.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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