Effects of Central Bank Rate Pass through on Kenya’s Selected Macroeconomic Variables
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Date
2024-03
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Journal ISSN
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Publisher
Kenyatta University
Abstract
The study focused on the effects of central bank rate pass through on Kenya’s
selected macroeconomic variables. Up until now, most research concentrated on
other, shorter-term interest rates such as the repo and interbank rates, which are
almost entirely endogenous to the bank rate. After controlling for other variables,
there is a significant negative correlation of five percent between the central bank's
interest rate and the overall market capitalization. There is a 0.7513 connection
between them. According to the study, real GDP growth in Kenya increases by 0.29
percentage points whenever the central bank rate is changed. The interest rate pass
through loans as the CBR changes was found to be 0.9666 percent in the short run,
while it was 1.29 percent in the long run. Stock or asset values rise by 2.957
percentage points for every percentage point increase in the central bank rate.This
study made use of time series data collected between 2010 first quarter and 2021
fourth quarter. The Blanchard model (based on the Exponential Generalized
Autoregressive Conditional Heteroscedastic estimating technique), the co integration approach (based on the co-integration strategy and the Johansen and
Juselius (1980) approach), and the co-integration approach (based on the Engle and
Granger (1987) approach) were the methods employed in the study to estimate the
Autoregressive Distributive Lag model. The study concluded that the real gross
domestic product, stock market capitalization, and lending rates were not fully
impacted by changes in the central bank's bank rates. For policy implication, Kenya
needs a comprehensive review of its current monetary policy framework. This
should be done in tandem with ongoing efforts to modernize the nation's banking
and financial sector. The Monetary Policy Committee should be aware of the
character and structure of commercial banks. Timing is of utmost importance when
it comes to altering the Central Bank Rate. The research discovered an
unsatisfactory pass-through effect when analyzing the impact of CBK on real GDP,
lending rates, and stock market capitalization.
Description
A Thesis Submitted in Partial Fulfilment of the Requirements for the Award of the Degree of Doctor of Philosophy (Monetary Economics) to the School of Business, Economics and Tourism of Kenyatta University, March 2024.
Supervisors
1. Jennifer Njaramba
2. James Maingi