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On the Sources of Inflation in Kenya: A Model‐Based Approach
Authors:Michal Andrle  Andrew Berg  R. Armando Morales  Rafael Portillo  Jan Vlcek
Affiliation:1. Research Department, International Monetary Fund, Washington, DC, USA;2. International Monetary Fund, Washington, DC, USA;3. 2026239329;4. OGResesarch, Prague, Czech Republic
Abstract:We develop a semi‐structural new‐Keynesian open‐economy model – with separate food and non‐food inflation dynamics to study the sources of inflation in Kenya in recent years. To do so, we filter international and Kenyan data (on output, inflation and its components, exchange rates and interest rates) through the model to recover a model‐based decomposition of most variables into trends (or potential values) and temporary movements (or gaps) – including for the international and domestic relative price of food. We use the filtration exercise to recover the sequence of domestic and foreign macroeconomic shocks that account for business cycle dynamics in Kenya over the last few years, with a special emphasis on the various factors (international food prices, monetary policy) driving inflation. We find that while imported food price shocks have been an important source of inflation, both in 2008 and more recently, accommodating monetary policy has also played a role, most notably through its effect on the nominal exchange rate. We also discuss the implications of this exercise for the use of model‐based monetary policy analysis in sub‐Saharan African countries.
Keywords:E52  E58  F47  O23  Monetary Policy  Forecasting  Food Prices  Kenya  Low‐Income Countries
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