Interest rate pass‐through in Kenya

Abstract

PurposeThis study aims to quantitatively measure the size and speed of monetary policy interest rate transmission to long‐term interest rates in Kenya.Design/methodology/approachThe study uses autoregressive distributed lag specification re‐parameterized as an error correction model and mean adjustment lag methods.FindingsThe study finds incomplete pass‐through of policy rates both in the short and the long run. The study also shows that it takes approximately between 11 months to two years for policy interest rate to be fully transmitted to long‐term rates.Originality/valueThe study is novel as it is the first attempt the authors are aware of that empirically investigates the interest rate pass‐through in Kenya using high‐frequency data. Measuring the speed and size of interest rate pass‐through provides policy makers with insights on how long it takes for a particular policy action to yield desired results on the real economy. The findings of this study will therefore inform policy makers of the effectiveness of their policy decisions and facilitate timely monetary policy actions.