Inflation Targeting and Its Effect on Food Price Volatility in Kenya
Loading...
Date
2024-07
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Inflation targeting was adopted by the Central Bank of Kenya in 2011 to control
inflation and ensure price stability. Despite this strategy, Kenya persistently
experiences volatile food prices, presenting substantial socioeconomic challenges.
High and unpredictable food prices predominantly affect low-income households that
allocate a significant fraction of their earnings on food. The study aims to add to the
literature gap by investigating the efficacy of inflation targeting in stabilizing food
prices within Kenya. Even though the Central Bank has met its inflation objectives
over the past decade, it has found it challenging to mitigate recurring food price shocks
due to various factors, including global commodity prices, exchange rate dynamics,
climatic changes, and regional disputes. The research specifically delves into three
primary objectives: assessing the contribution of food prices to Kenya's overall
inflation, scrutinizing the influence of global food prices on domestic prices, and
examining the impact of inflation targeting on food inflation. The research leverages
secondary time series data from 2011-2022 sourced from Central Bank of Kenya,
Kenya National Bureau of Statistics , and Food and Agricultural Organisation reports,
encompassing parameters like the Consumer Price Index, exchange rates, food prices,
and broader macroeconomic variables. This investigation employs a multivariate
linear regression model in the STATA software. The findings reveal that inflation
targeting, while meeting overall inflation objectives, has been less effective in curbing
the volatility of food prices. The study suggests that to ensure food price stability, a
broader approach incorporating additional policies is necessary. The findings of this
study offer insights into supplementary policies required to safeguard food price
stability in Kenya, highlighting the need to venture beyond mere monetary policies.
The significance of this investigation is manifold. For policymakers, especially within
the Central Bank of Kenya, it offers nuanced insights that can guide monetary and
fiscal policies, acknowledging the layered complexity of food price dynamics. As
volatility in food prices can reverberate through the socio-economic fabric of Kenya,
affecting food security, farmers' incomes, and the general populace's welfare, these
findings provide a roadmap for harmonizing strategies across monetary, fiscal, and
trade domains. Investors and the business sector too can benefit, using the gleaned
knowledge to navigate the labyrinth of food price instability and making sagacious
financial choices. Furthermore, this study underscores the imperative of empirical
analyses in emerging economies, which can act as touchstones for sculpting policies
that aim at poverty mitigation and sustainable development.
Description
A Research Project Submitted to the Department of Economic Theory in the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Economics (Policy and Management) of Kenyatta University July, 2024
Supervisor
Isaac Kimunio