Determinants of Inflation in Kenya 1970 -2006

Abstract

This paper investigates the relationship between inflation and exports, imports, money stock and exchange rates in Kenya from 1970-2006 using regression analysis.  Time series data was used for the study. Data was sourced from the World Bank and the Central Bank of Kenya. The results show that in the long run exports, imports, money stock and exchange rates were significant in determining inflation.  In the short-run, imports and exchange rates were found to have positive significant impact on inflation while exports and money stock had negative impact. The speed of adjustment was 38 percent. On the basis of the results, it is recommended that policies to reduce imports, government deficits and subsidize agricultural inputs be implemented. Interest rates should be set to a level that will encourage investments and increase production levels. Exchange rate system should be maintained at a level that will not impose a threat on the Kenyan economy and efforts should be doubled in oil exploration to reduce import costs.