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AEC 2012 - Central Bank’s Response to Economic Crises from a Developing African Economy Perspective Lessons from Kenya’s Experience

16-Oct-2012

Much of the debate on the policy responses undertaken with respect to the global financial crisis has largely focused on advanced economies, leaving out African economies’ perspective. This paper examines the Central Bank of Kenya’s policy responses in mitigating the economic effects of the global as well as domestic crisis that preceded the effects of the global crisis in the early 2008. We note that whereas the policy interventions were initially effective in restoring confidence, lowering the short term interest rates and maintaining macroeconomic stability, the loose monetary policy stance could not be sustained following increased inflationary pressures and unprecedented depreciation of the exchange rate. The abrupt shift to a tight monetary policy stance led to a sudden rise in both short term and long term interest rates, thus partly counteracting the gains that had been achieved. Additionally, an assessment of the effectiveness of monetary policy using VAR analysis indicates weak monetary policy transmission mechanism. There are important lessons that can be drawn from Kenya’s experience: the need for a clear exit strategy particularly when adopting a major policy shift, strengthening of the monetary transmission mechanism in a way that make monetary policy more effective and, a wholistic approach to addressing structural weaknesses and vulnerability of most African economies to shocks, since monetary policy on its own is not adequate.

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