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Empirical analysis of monetary policy reaction function in an emerging African market economy

Published Online:September 4, 2014pp 340-353https://doi.org/10.1504/IJEBR.2014.064672

Abstract

The paper analyses monetary policy reaction function for Kenya using quarterly data for the period 1999 to 2011. The empirical results show a strong effect of interest rate smoothing and support the fact that monetary policy was accommodative of the output growth objective. The response to inflation is however, generally found to be low, perhaps signifying the importance of supply-side inflation. Nonetheless, there is evidence in support of forward-looking monetary policy, which is critical in view of the increasing role of expectations in modern monetary policy-making process.

Keywords

reaction function, policy rule, monetary policy, Taylor rule, interest rate smoothing

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