Our inflation is hardly ever demand driven..

The inflation is usually caused by inadequate food supply, high world fuel prices, inefficient power supply, and rising import prices caused by a weak shilling, inappropriate technology, and monopoly power.. These are mostly problems with the supply chain

Simply put Keynesian economics cannot solve these problems..

Raising the bank rate and cash ratio will not reduce fuel prices, neither will it bring rain for planting, nor will it build geothermal dams and it will definitely not improve the situation in europe.. Inflation hence remains high..

What it will do though is discourage investment and increase downsizing in firns and the rates of default on loans.. Unemployment thus starts to rise..

Keynesian economics for kenya results in inflation remaining high while at the same time manufacturing unemployment hence stagflation arises..

Developed countries have no problems with supply issues so inflation is almost always demand driven and they can use keynes theory..

Interesting points. The great thing about most central banks is that they are pretty predictable during times of crisis. CBK told us what they were going to do long ago, but, we didn’t know the timing.

I recently read a CBK discussion paper dated May 2011 (ts somewhere on the CBK website). On page 26 it says the following “The second option for the CBK is to assume that the supply shock is equivalent to a demand shock and neutralize the initial impact on inflation using contractionary monetary policy… practically the reduction in output will come as a result of a substantial increase in the cost of credit. Modern central banks advocated for this solution when rising food and energy prices continue over a longer period, contributing to indirect or second-round effects, which affect the wage and price-setting behavior of businesses and households. Additionally, this option is appropriate when the supply shocks unanchor inflation expectations over the policy horizon. In this situation the central bank takes decisive action and strong anti-inflation pronouncements”.

The document goes on further to say “The appropriate response is that if the supply shocks are transitory and/or limited in scale, they do not require an immediate action by the CBK. If the shocks are strong, which may bring about a permanent rise in inflation expectation, and in turn a further increase in inflation due to building wage pressure, CBK should contain secondary effects of the supply shock (second-round effects)”.

They’ve simply followed what they intended to do if things got out of hand and they've let you know this as far back as May 2011.

The first thing I think of when I hear Keynes is deficit spending. It’s very unlucky that Kenya’s in a perfect storm purely because of the drought, but indeed the governor still acknowledges that it’s supply side shocks ailing the economy. Deficit spending implies the need to import especially for a country like ours that lacks certain key resources. According to IMF Kenya is one of the worst in terms of external shocks where a 1% increase in world food price results in a 1.1% in domestic prices. Even Uganda isn’t that bad. Most unfortunate for us.

Look at the moral hazard of the Gauranteed Loans Act, CAP 467. It allows KenGen to take loans at subsidized rates to fund legitimate energy infrastructure. So the BOP equation is balanced, KenGen imports (debit) whatever and Japan finances it (credit). But the current account records a higher deficit. If Kengen was investing in clean energy I’d be happy, but all they did was install a thermal generator before IPPs increased capacity on their thermal generators. I wish LTWP was helped in this way. Then KenGen hides forex losses in shareholders’ funds one year then moves yen loan denominated losses to receivables the next. They’re now owed the money!

So why do we export? To import! Comparative advantage. Something interesting Peter Schiff said in his talk to bankers (watch below).

http://www.youtube.com/watch?v=6G3Qefbt0n4

Yes raising interest rates will slow down investments, economic growth, but who’s to say we’re not already overinvested as a country (at this point in time). Have you seen our savings rate? So if we are investing so much money then why is there no growth in exports. We hoping that services (tourism) and remittances will help out but they’re aren’t growing fast enough. So IMF funds are necessary to bridge the gap because we have no support to continue financing the deficit.

Inflation will decline as a function of the exchange rate appreciation but the most important thing here is that inflation expectations will also change (that’s why he’s taken the measures he’s taken). As it is unemployment was also gonna rise if the shilling hit 120 (coupled with a lovely debt and banking crisis). The governor is a Keynesian and he’d agree with you completely, but, this time he’ll say he’s a psychologist now not an economist.

A private sector recovery started the problem so Gov must kill the private sector. According to Wiki "Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle".

http://en.wikipedia.org/wiki/Keynesian_economics

@ Scubidu

Thanks for the insight. However I still insist that your answer does not apply to our economy. As most posts above have stated

May be a better question should be,

WHAT IS AILING THE KENYAN ECONOMY. If we can answer this question, then may be we can better analyse the responses takne by Le'prof.

Increase in interest rates is meant to channell funds away from the private sector to the public sector (govt). However, in our case the public sector is very wasteful and are the reason we are in this position. they are incapable of keeping up with the private sector growth and in many cases, their input retards the growth.

Yes... many posts have stated many things... which do you think has been most accurate? How about we start there.