The Relationship Between Monetary Policy and Economic Growth in Kenya

Abstract

Monetary policies are some of the main drivers of the economic growth as it directly impacts on the key economic variables. Economic growth on the other hand plays a key role in improving citizens’ standards of living by influencing key economic factors. Monetary policies have attracted a lot of interest in past from various scholars as they are significant subject under macroeconomic theory. The objective of the study was to determine the relationship between monetary policy and economic growth in Kenya. The neoclassical growth theory, the quantity theory of money, the liquidity preference theory and the new classical monetary tool formed the theoretical foundation of the study. The study employed a descriptive research design and used quarterly secondary data covered a 10-year period (2008-2017). The study used descriptive statistics to summarize the collected data into meaningful form. Further, the study employed correlation to establish the strength of association among the study variables and the multiple regression model to establish the association among the study variables. The result revealed a positive and not statistically significant relationship between the central bank rate and economic growth (GDP) and that the relationship between open market operations (OMO) and real GDP in Kenya was negative and significant. The findings also found that relationship between cash reserve ratio and real GDP was positive and significant while the relationship between exchange rate and real GDP was positive and statistically significant. Finally, the study found that the relationship between interest rates and real GDP was positive and not statistically significant. The study concluded that the open market operations, cash reserve ratio and exchange rates significantly influence economic growth in Kenya while the central bank rate and interest rates does not have a significant influence on economic growth in Kenya. The study recommended that the Central Bank of Kenya and the ministry of finance should use the open market operation mechanism to raise finance since the use of open market operation tools enhances economic growth and should set appropriate ratio of cash reserves requirement, which will in turn translate to economic growth in Kenya.