Two Stage Interest Rate Pass Through In Kenya

Citation:
Pokhariyal GP;, Mahasi J. "Two Stage Interest Rate Pass Through In Kenya.". 2013.

Abstract:

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

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