Money supply determination in Kenya: a macroeconometric analysis
Monetary policy plays an ever-increasing role as an economy develops. The understanding of money supply determination is important in formulating correct monetary policy measures. This study investigated the impact of high-powered money and the basic ratios of money multiplier on money supply. Time series data used for estimation were obtained from published documents from the central bank of Kenya. The only artificial variable constructed is quarterly data for income. The results show that high-powered money and the various deposit and reserve ratios are all significant in the determination of money supply in Kenya. On the basis of empirical results. It is recommended that: (a) Greater stability to sought on the balance of payments to increase predictability of the high-powered money as it was found to be the most important determinant of money supply. (b) The government budget gap is narrowed to reduce government domestic credit so as to enable the central bank to have some grip over high-powered money. Budget deficit in Kenya have been shown to exert a powerful impact on trends in domestic credit and money, and this applied to deficits financed externally. (c) Effective ways of controlling bank credit be designed and implemented in response to changes in their liquidity. This can involve use of banks reserve base which requires raising of liquidity ratios until they affect credit creation by the banks.