Appendix. A Robustness Analysis
In this appendix, the robustness of the main econometric results of the paper is examined.
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The author would like thank Godfrey Kalinga, Anne-Marie Gulde-Wolf, and Lusine Lusinyan for their helpful comments.
The sample is truncated at 1997 because the CBK embarked on the open market operations using repurchase agreements to manage daily liquidity since end-1996. In addition, prior to the mid-1990s, Kenya undertook a host of drastic financial reforms, such as an exchange rate regime change, liberalization of trade and the capital account, as well as the removal of interest rate controls. Estimating the model using longer time series may capture extensive structural breaks, thereby rendering technical problems for the VARs.
Kenya has a managed-float exchange rate regime. Foreign exchange operations have not been geared towards managing domestic liquidity.
While the OMO could also inject liquidity into the banking system, most operations in recent years had aimed at mopping up excess liquidity.
While the sample period for the econometric analysis starts at 1997, one year is lost when computing the growth rates for some variables. Therefore, the stylized facts only focus on developments since 1998.
The decrease in the reserve requirement from 10 percent to 6 percent in mid-2003 further fueled the growth of money.
Monthly GDP is obtained by interpolating the annual GDP based on monthly production data of key sectors in the economy.
The 95 percent confidence band is obtained by bootstrapping with 500 replications, as described in Hall (1992).
The p-values are computed by bootstrapping.
There are also other possibilities of robustness exercises, which have been examined but are not reported here. The results are available from the author upon request.