Effectiveness of the Monetary Policy

Various studies have reflected the existence of a positive relationship between the increase of money supply and the level of inflation. Generally, this is reflected by the continued rise of prices of the various products. A situation ensues where excess amounts of money tend to be chasing too few goods. In this perspective, this study tested on whether monetary policy is an effective tool in the combating of inflation. The data utilized was derived from Kenya’s economic situations over a range of years. The period in perspective was that between the years 2001 and 2010. During this period, Kenya faced various catastrophic economic events. Some instances of political instabilities, depressions, and economic recessions were vividly witnessed. In addition, the level of inflation was at an all-time high. During this duration, various monetary policies and tools were utilized by the Central Bank of Kenya. As such, this range was most suitable for this research. The research used ordinary least square model (regression model) in the endeavor. The research found out the money supply has a direct impact on the level of inflation. Statistically, money supply has a statistical significance on the level of inflation in the country. Thus, monetary policies aimed at controlling the amount of money supply in the economy, have a tremendous impact on controlling the level of inflation.

ABBREVIATIONS
M - MONEY SUPPLY
P - PRICE
USD - UNITED STATES DOLLAR
T - TRANSACTIONS
CBK -CENTRAL BANK OF KENYA
GDP - GROSS DOMESTIC PRODUCT
IT - INFLATION TARGETTING
V -VELOCITY OF CIRCULATION
BOP -BALANCE OF PAYMENTS
CPI -CONSUMER PRICE INDEX

Contents
1.0 CHAPTER I 1
1.1 Introduction 1
1.2 Background Analysis 2
1.2.1 Monetary Policy Instruments 6
1.2.1.1 Interest rate policy 6
1.2.1.2 Minimum liquidity asset ration 6
1.2.1.3 Open Market Operations 6
1.2.1.4 Selective Credit Control 7
1.2.1.5 Inflation Targeting 7
1.2.2 Failure of Monetary Policy in

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