Kenyan Monetary Policy in a New Keynesian Framework

By Kethi Ngoka – Kisinguh
2010
The aim of this paper is to lay out and calibrate a small open economy dynamic stochastic general equilibrium model consisting of an IS curve, a New Keynesian Phillips curve, an exchange rate equation and a policy rule for monetary policy analysis. We shock the model and make use of the associated impulse responses to analyse issues of importance to monetary policy. The analysis shows that monetary policy is more effective than fiscal policy. Specifically, a tightening of monetary policy via a policy rate reduces output contributing to lower inflation. A tightening of fiscal policy has a negative effect on the output gap though short-lived.