Academic Programs Graduate Research Projects Effectiveness of the credit channel in transmitting monetary effects to the Kenyan economy
| Effectiveness of the credit channel in transmitting monetary effects to the Kenyan economy |
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Josephine Namukuru Omukubi This study examines the effectiveness of the the credit channel in transmitting monetary effects to the Kenyan economy. Extensive economic research has shown that monetary policy is neutral in the long run but it does affect real economic activity in the short run (Eishenbaum 1997). The basic idea behind the concept of the credit channel is that the central bank impulses affect output as an upshot caused by shifts in the supply of loans.It is therefore expected that growth in credit that comes from expansionary monetary policy will induce investment growth ultimately leading to economic growth.But when credit grows and the economy does not grow proportionately, then that means theat credit growth is not inducing investment demand that is necessary to induce economic growth.The specific objectives of the study are to establish whether commercial bank deposits, loans and advances, bank lending rates and money supply affect economic growth. Using Structural Vector Autoregression, Cointegration, Impulse response graphs and forecast error variance decomposition, the results show that positive shocks to Commercial bank deposits, loans and advances and money supply were found to have a positive effect on credit growth whereas shocks on the lending rate had a negative effect on credit growth implying that high lending rates by commercial banks discourages issuing out of loans and advances which later has a negative effect on credit growth. The Central Bank should stimulate economic growth by using the policy instruments such as the central bank rate to regulate lending rates of Commercial Banks, enhance loans and advances and also encourage increase in commercial bank deposits through the general reserve requirements.
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| Last Updated on Wednesday, 23 November 2011 21:40 |
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