The authors 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, they 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. They 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. They 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. They also discuss the implications of this exercise for the use of model-based monetary policy analysis in sub-Saharan African countries.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Andrle, M. , Berg, A. , Morales, R. A., Portillo, R. and Vlcek, J. (2015), South African Journal of Economics. S Afr J Econ, 83: 475-505. doi:10.1111/saje.12072
On the Sources of Inflation in Kenya: A Model-Based Approach
Published 13 November 2014