Effects of Monetary Policy on Economic Growth in Kenya

Abstract

This paper investigates the effects of monetary policy on economic growth in Kenya. It used annual time series data from 1987-2016 with the objective of investigating the effects of different monetary policy instruments (Broad money supply, Treasury bill rate, Exchange rate and Cash reserve requirement) on economic growth in the country. The study used the error correction model (ECM) to capture the effects of the different monetary policy instruments on economic growth. The study found out that only Treasury bill rate and exchange rate had significant effects on economic growth while Money supply and Cash reserve ration had no significant effects on growth. The low R-squared of 0.328. The findings from this study show that monetary policy did not have any significant effect on economic growth during the period under review due to the shortcomings of the monetary instruments used. The study recommended that the central bank should formulate robust policies that will enhance financial deepening to increase the number of participants in the formal financial services thereby enhancing the effectiveness of monetary policies