Monetary policy and economic growth in Kenya:The role of money supply and interest rates

Abstract

Using the autoregressive distributed lag (ARDL) bounds testing approach; this paper examines the short-run and long-run impact of monetary policy on economic growth in Kenya for the period 1973 to 2013. The paper uses both the broad money supply and the 3-month Treasury bill rate as proxies of monetary policy. Both short-run and long-run empirical results support monetary policy neutrality, implying that monetary policy has no effect on economic growth – both in the short run and in the long run. This could be due to the fact that the increasing fiscal deficits funded domestically in Kenya could have weakened the transmission of monetary policy actions into the real economy. The study recommends that policies aimed at improving the institutional and regulatory environment for the financial sector and monetary policy conduct should be pursued in Kenya. There is also a need for improvement in policy coordination, particularly monetary and fiscal policies.