Policy Brief No. 08 of 2001 on The KIPPRA-Treasury Macro Model: A New Instrument for Policy Analysis and Forecasting

Abstract

This brief provides a bird’s-eye view of the KIPPRA-Treasury Macro Model (KTMM) and its importance in policy analysis. KTMM is built mostly along the now fairly standard lines of the aggregate demand aggregate supply framework. The model is demand driven in the short run, with multiplier effects through consumption and investment and the external sector. An important assumption of this model is that any demand is actually met, that is, we assume that the price system ensures that there is always some excess capacity in the economy. This assumption is justified by the liberalised nature of the Kenyan economy. The model is designed in such a way that it tends to return to equilibrium with 'normal' capacity use and unemployment rates in the medium and long run. The main feedback mechanisms in the real economy work through the wage-price spiral, the interest rate and the real exchange rate.