Effect of Inflation Targeting on the Inflation Rate in Kenya

Abstract

Inflation targeting has been widely adopted as monetary policy tool by both developed and developing economies. Kenya, through the Central Bank of Kenya formally adopted inflation targeting as a major monetary policy framework in 2013. This study sought to determine the effect of inflation targeting on the inflation rate in Kenya since adoption. The specific objectives included; to determine whether inflation rates had reduced and, to determine whether inflation rate volatility had reduced since the adoption of inflation targeting. In meeting these research objectives, the study adopted a quantitative method to investigate the behavior of inflation rates before the adoption of inflation targeting (2005-2013) and after the adoption of inflation targeting (2013-2018). Secondary quantitative data was collected from the Central Bank of Kenya. The tool used for the study was SPSS V21where test of difference in means between the pre and post inflation targeting periods was conducted. Regression analysis was used to determine the relationship as well as the degree of the relationship between inflation targeting and the inflation rate.The results from the study revealed that there was significant difference in mean inflation rates between the two periods. The mean inflation rate post inflation-targeting period was found to be significantly less than the mean inflation rate pre inflation-targeting period. The study also revealed that Inflation targeting had a statistically significant effect to reduce inflation The study concluded by supporting the argument in the literature that Inflation targeting affects inflation rate negatively and also reduces inflation volatility.