Muniu, J. M.Mucheru, Ezekiel Mucheru2013-12-172013-12-172013-12-17http://ir-library.ku.ac.ke/handle/123456789/8114Monetary 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 inflationenThesis