This chapter was prepared by Kevin C. Cheng (AFR).
Three concepts of underlying inflation are currently used for Kenya. The Central Bureau of Statistics of Kenya compiles a measure that excludes only food and nonalcoholic beverages (FNB). In addition to excluding FNB, the underlying inflation used by the Central Bank of Kenya to guide monetary policy, excludes fuel and power (FP) as well as transport and communication (TC). The underlying inflation presented in the Fund’s Staff Reports excludes FNB as well as FP while including TC.
Apart from its significance in the Kenyan diet, maize production is also a good proxy for crop production generally, because adverse weather with a significant impact on maize production usually also affects the output of other food crops, such as wheat and beans.
In this paper, the growth rate of M3X in terms of the current exchange rate is used. The Staff Report presents money growth rates in terms of a constant program exchange rate.
The sample is truncated in 1995 because prior data cover a period of extremely high inflation peaking at over 60 percent in early 1994. Extending the data to an earlier period could potentially distort the estimates for the later period, which is the focus of this paper.
Maize is included in the regression owing to its significance in the Kenyan diets. This variable is preferred to a more aggregate measure, such as the total agricultural production, which includes a sizable amount of commodities meant for exports, such as tea, coffee, and horticulture that do not carry significant weights in the CPI basket.
For each variable included in the regression, an Augmented Dickey-Fuller test rejects the hypothesis of a unit root.
Fiscal variables have also been used initially, but were later dropped because of their statistical insignificance.
Growth rate is in terms of a constant program exchange rate.