A dynamic model of inflation of Kenya, 1974-96

This paper analyses the dynamics of inflation in Kenya between1974 and 1996, a period characterised by eternal shocks andinternal disequilibria. By developing a parsimonious and empiricallyconstant model, we find that the exchange rate, foreign pricesand terms of trade have long-run effects on inflation, whilemoney supply and interest rate only have short-run effects.Inertia is found to be important up until 1993, when about 40%of the current inflation was carried over to the next quarter.After 1993, inertia drops to about 10%. Moreover, inflationis also influenced by changes in maize-grain prices, indicatinga non-negligible role for agricultural supply constraints inthe inflation process.