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A Dynamic Model of Inflation for Kenya 1974 - 1996

Author

Listed:
  • Durevall, Dick

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

  • Ndung'u, Njuguna S.

    (Department of Economics, University of Nairobi)

Abstract

This paper develops an error correction model with the aim of analysing the behaviour of prices in Kenya during 1974 -1996. In estimating the model, we first test for cointegration in the money and foreign exchange markets, using the Johansen procedure. The cointegrating vectors are then included in an autoregressive distributed-lag model, and a general-to-specific procedure is applied to obtain a parsimonious, empirically constant, error correction model. We find that in the long run inflation emanates from movements in the exchange rate, foreign prices, and terms of trade. The error correction term for the monetary sector does not enter the model, but money supply and the interest rate influence inflation in the short run. Inflation inertia is found to be an important determinant of inflation up until 1993, when about 40% of the current inflation is carried over to the next quarter. After 1993, inertia drops to about 10%. The dynamics of inflation are also influenced by food supply constraints, proxied by maize-price inflation. These findings indicate that the exchange rate is likely to be a more efficient nominal anchor than money supply, and that inflation could be made more stable by policies that secure the supply of maize during droughts.

Suggested Citation

  • Durevall, Dick & Ndung'u, Njuguna S., 1998. "A Dynamic Model of Inflation for Kenya 1974 - 1996," Working Papers in Economics 7, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0007
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    Citations

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    Cited by:

    1. Mr. Kevin C Cheng, 2006. "A VAR Analysis of Kenya’s Monetary Policy Transmission Mechanism: How Does the Central Bank’s REPO Rate Affect the Economy?," IMF Working Papers 2006/300, International Monetary Fund.
    2. Asghar Shahmoradi & Hamed Shakouri, 2010. "Investigation on the Impact of an Energy Desubsidization Shock on the General Price Index Via a Nonlinear Inflation Model: Case of Iran," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 15(3), pages 33-51, fall.
    3. Loening, Josef L. & Durevall, Dick & Ayalew Birru, Yohannes, 2009. "Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia," Working Papers in Economics 347, University of Gothenburg, Department of Economics.
    4. Moses C. Kiptui, 2014. "Some Empirical Evidence on the Stability of Money Demand in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 849-858.
    5. Nandwa, B., 2006. "Implication of the Taylor Rule on Real Exchange Rate Movement in Kenya," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
    6. Durevall, Dick & Loening, Josef L. & Ayalew Birru, Yohannes, 2013. "Inflation dynamics and food prices in Ethiopia," Journal of Development Economics, Elsevier, vol. 104(C), pages 89-106.

    More about this item

    Keywords

    Kenya; Inflation; Inertia; Money demand; Food supply; Real exchange rate; Terms of Trade; Cointegration; Error Correction Model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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