Two Stage Interest Rate Pass Through In Kenya
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Date
2013Author
Pokhariyal, Ganesh P
Mahasi, John
Type
ArticleLanguage
enMetadata
Show full item recordAbstract
Interest rate volatility is a major concern for emerging economies due to its crippling effects on the economy.
There is wide ranging disconsensus on the effectiveness and speed of various tools. This paper proposes timely
monetary policy mediation to curb interest rate volatility through the determination of the total time taken for
the effects of monetary policy instruments to transmit to via the interest rate channel to market rates. A change
in the Central Bank Rate (CBR) will trigger a corresponding change in intermediate variables (Treasury bill (Tbill),
Repurchase agreement (REPO) and Interbank rates) in the first stage of transmission. The second stage
measures the transmission from the intermediate variables to market rates. The study uses an Auto Distributed
Lag (ADL) specification parameterized as an Error Correction Model (ECM) with primary data coming from
Central Bank of Kenya (CBK). The results indicate it takes 7 days for monetary policy adduced shocks to
transmit from CBR to REPO, 3 months from CBR to T-bill and 12 months from CBR to interbank for the l"
stage. At the second stage it takes 3 months for the adduced shocks to transmit from interbank to market rates
and 10 months from T-bill to market rates. The paper proposes that CBK considers alternative monetary policy
transmission channels as well as adopting a hybrid approach to monetary policy control. The study is the first to
measure the complete two stage interest rate pass-through in Kenya and will contribute the scarce but steadily
growing pool of literature on the subject in Kenya and Sub-Saharan Africa. The study will aid economists in
determining the appropriateness ofthe interest rate channel based on its speed
Citation
Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 4(1): 54-61Publisher
School of Business, University of Nairobi School of Mathematics, University of Nairobi