Financial Innovations and Monetary Policy in Kenya

Nyamongo, Esman and Ndirangu, Lydia Ndirangu2 (2013): Financial Innovations and Monetary Policy in Kenya.

Abstract

The objective of this study is to analyze the effects of financial innovation in the banking sector on the conduct of monetary policy in Kenya during 1998-2012. The country has witnessed a number of financial innovations during this period. The study focuses on whether these wave of financial innovations have impacted on the transmission mechanism of monetary policy, and if so how. The results show that the innovations have improved the monetary policy environment in Kenya as the proportion of the unbanked population has declined coupled with gradual reduction in currency outside banks. However, the period post 2007 when the country has experienced the fastest pace of financial innovation, is associated with instability in the money multiplier, income velocity of money and the money demand. However, recent trends point towards stabilization pointing to the need for further examination establish whether indeed the break in trend is of structural or transitory in nature. A structural break raises questions on the credibility of the current monetary targeting framework in use in Kenya, in view of which a more flexible framework should be adopted. Overall, the results show that financial innovation has had positive outcomes and seems to improve the interestrate channel of monetary policy transmission.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy, excess liquidity, Kenya, financial innovation
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

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