Monetary Policy Reaction Function in the Presence of Oil Price Shocks in Kenya
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Date
2013-12-17
Authors
Mucheru, Ezekiel Mucheru
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Abstract
Monetary authorities have been confronted with a tradeoff between stabilizing
inflation and output whenever there is oil I price shock. Such shock induces a
systematic response of monetary policy. The response has been criticized as
being the source of adverse effect affecting economic activities by mostly
derailing economic growth due to exaggerated leaning on stabilizing price
levels, Kenya has suffered as a result of being a net importer of oil with oil
price shocks destabilizing the economy.
This study investigates Kenya's monetary policy reaction function in midst of
oil price shocks and assess the impact the shocks have on inflation and output.
The main result is that oil price shocks affects both inflation and output but
monetary authority magnifies the effects of tile shocks while fighting inflation
caused by the shocks. These effects last to a period of four years before
stabilizing. This is in line with other studies curried out in other countries
which call for monetary authority dealing with underlying shocks that drive real prices other than
concentrating on inflation