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The Effect of Monetary Policy on Private Sector Investment in Kenya

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  • Tobias Olweny
  • Mambo Chiluwe

Abstract

The study explores the relationship between monetary policy and private sector investment in Kenya by tracing the effects of monetary policy through the transmission mechanism to explain how investment responded to changes in monetary. Several studies have offered a means to understand the manner in which monetary policy actions affect investment, prominent among them are the Classical school, Majumder (2007), the Keynesian, Barro (1997), and recently the Credit Channel Approach, Kahn (2010), Bernanke and Gertler (1995). The study utilises quarterly macroeconomic data from 1996 to 2009 and the methodology draws upon unit roots and cointegration testing using a vector error correction model to explore the dynamic relationship of short run and long run effects of the variables due to an exogenous shock. The variables are stationary in first differences and using ordinary least squares the estimated long run relationship is: LRPSC = 1.84 - 0.54LRGDD + 0.62LRGDS + 0.75LRMS - 0.04LTBILLÂ . Â Implying that government domestic debt and Treasury bill rate are inversely related to private sector investment, while money supply and domestic savings have positive relationship with private sector investment consistent with the IS-LM model. Based on the empirical results the study suggests that tightening of monetary policy by -1 percent has the effect of reducing investment by -2.63 while the opposite loose monetary policy tends to increase investment by 2.63.The error correction term (ECT) of -0.55 is negatively signed indicating a move back to equilibrium suggesting that following an exogenous shock, 55 percent of the disequilibrium is corrected after one quarter.

Suggested Citation

  • Tobias Olweny & Mambo Chiluwe, 2012. "The Effect of Monetary Policy on Private Sector Investment in Kenya," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 2(2), pages 1-9.
    • Handle: RePEc:spt:apfiba:v:2:y:2012:i:2:f:2_2_9
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    Citations

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    Cited by:

    1. Benish Naseem, 2017. "The Impact of Demand Management Policies On Domestic and Foreign Direct Investment in Case of Pakistan: A Time Series Analysis," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 6(4), pages 175-184, December.
    2. Ateyah M. Alawneh & Torki M. Al-Fawwaz & George N. Shawaqfeh, 2015. "The Impact of the Fiscal and Quantitative Monetary Policies on the Domestic and Foreign Direct Investment in Jordan: An Empirical Study," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 5(4), pages 1-10, October.
    3. Thuy T. Dang & Anh D. Pham & Diem N. Tran, 2020. "Impact of Monetary Policy on Private Investment: Evidence from Vietnam’s Provincial Data," Economies, MDPI, vol. 8(3), pages 1-15, September.
    4. Ephraim Ugwu & Johnson Okoh & Stella Mbah, 2017. "The Link Between Bank Credit And Private Sector Investment In Nigeria From 1980-2014," Oradea Journal of Business and Economics, University of Oradea, Faculty of Economics, vol. 2(1), pages 43-54, March.
    5. Linh My Tran & Chi Hong Mai & Phuoc Huu Le & Chi Linh Vu Bui & Linh Viet Phuong Nguyen & Toan Luu Duc Huynh, 2019. "Monetary Policy, Cash Flow and Corporate Investment: Empirical Evidence from Vietnam," JRFM, MDPI, vol. 12(1), pages 1-14, March.
    6. Richardson Kojo Edeme & Clifford Nworah Obiayo, 2017. "Analysis of the Responsiveness of Non-Oil Exports to Fiscal and Monetary Policy Actions," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 3(3), pages 92-101, September.
    7. Al-Habashneh Fedel Mayuf, 2022. "The Narrow and Expanded Money Supply and Its Impact on Interest Rate and Product of the Private Sector in Jordan during the Period (1990–2019)," Foundations of Management, Sciendo, vol. 14(1), pages 143-154, January.
    8. Khadija Essalhi & Salah Eddine, 2023. "The Impact of Monetary Policy on Private Investment in Morocco: An Analysis Using a VECM Model [L'impact de la politique monétaire sur l'investissement privé au Maroc : une analyse à l'aide d'un mo," Post-Print hal-04303914, HAL.
    9. Vikela Liso Sithole & Tembeka Ndlwana & Kin Sibanda, 2021. "The Relationship between Monetary Policy and Private Sector Credit in SADC Countries," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 9(1), pages 46-54.
    10. Afolabi Mutiu Adeniyi & Adeyemi Kamar Kayode & Salawudeen Opeyemi Sakirat & Fagbemi Temitope Olamide, 2018. "Monetary Policy and Bank Credit in Nigeria: A Toda-Yamamoto Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 14(5), pages 717-735, OCTOBER.
    11. GIMBA John Toro & VINCENT Harrison S. & OYEDOKUN Godwin Emmanuel, 2020. "Effect Of Monetary Policy On The Performance Of Listed Deposit Money Banks In Nigeria," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 482-503, July.
    12. Manamani SAHOO, 2017. "Financial conditions index (FCI), inflation and growth: Some evidence," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(612), A), pages 147-172, Autumn.
    13. Andrew K. Kamenju & Dr. T. Olweny, 2021. "The Nexus Between Internal Investment and Economic Growth in Kenya," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(2), pages 1-2.

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