Policy Monitor, Issue 1 No. 2, October-December 2003 on Building and Construction Yet to Provide Impetus to Economic Recovery

Abstract

One of the Government of Kenya's policy objectives is to put in place sound macroeconomic policies to achieve economic and social targets. Fiscal and monetary policies are two instruments, among others, whose design has a critical bearing on the performance of the economy. A key consideration of the stance of monetary and fiscal policies that the Government should put in place is the potential output of the economy and, by implication, the output gap. Potential output is the maximum output the economy can sustain without generating a rise in inflation. Output gap on the other hand is the difference between the actual economic output and the nation's output potential. This gap is an important benchmark for assessing inflationary or disinflation pressur es in the economy. Measur ing the level of the economy's potential output and output gap therefore helps in identifying sustainable noninflationary growth and in assessing the most appropriate macroeconomic policies, specifically the most appropriate fiscal and monetary policies.