Policy Brief No. 17 of 2006 on the Future of Monetary Policy Regime in Kenya

Abstract

Monetary policy is one of the key macroeconomic policy tools that are used to influence macroeconomic variables by regulating monetary aggregates and/or terms and availability of credit in the economy. Its implementation captures the behaviour of monetary authority as it reacts to changes in an economy's macroeconomic environment. The reactions of the monetary authority are influenced by the goals of monetary policy, which include: price and output stability; exchange rate stability and establishing a stable financial system. The mandate of formulating and implementing monetary policy in Kenya is vested in the Central Bank of Kenya. It is mandated to formulate and implement monetary policy to achieve and maintain stability in the general level of prices. Determining how the Bank has reacted over time to different macroeconomic environments, and to what extent these actions were consistent with monetary policy objectives, is important for the future evolution of monetary policy. Understanding how the policy has been implemented, and recognizing the constraints faced, is important for any new monetary policy initiatives. Being an important macroeconomic management tool, achieving and maintaining price stability would enable economic agents to make business decisions with more certainty.