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What monetary policies does the Kenyan government use to control the supply of money in an economy?

Explain the monetary policies that the Kenyan government uses to control the supply of money in an economy.

Answers

Maurice
Open market operations: When the bank sells securities to be bought by members of the public, the buyers will pay by writing cheques on their accounts with commercial banks. This means a cash drain for these banks to the central bank. Conversely, if the central bank wanted to pursue an expansionary monetary policy by making more credit available to the public, it would buy bonds from the public.

Discount rate/bank rate: This is the rate on central bank advances and is also called official discount rate or “minimum lending rate”. The significance of this rate of interest charged by the central bank in one way or the other to commercial banks, as a lender of last resort, is that if this rate goes up the commercial banks, who find that their costs of borrowing have increased, are likely to raise their rates of interest on their learning to businessman and other borrows.

Supplementary reserve, requirements/special deposit
If the Central bank feels that there is too much money in circulation, it can in addition require commercial banks to maintain over and above cash or liquid assets some additional reserves in the form of Special Deposits. The commercial banks are asked to maintain additional deposits in their accounts at the central bank, deposits which cease to count among their reserve asses as cover for their liabilities.

Direct control and moral Suasion
The central bank can attempt simply to use “moral suasion” to persuade the commercial banks to restrict credit when they wish to limit monetary expansion.

General and Selective Credit control
The central bank can dictate a ceiling value to the amount of deposits the bank can crate. This is more effective in controlling bank leading than the cash and liquidity ratio. It can also encourage banks to lend more to certain sector of the economy (e.g. agriculture) than in another (estate building).
maurice.mutuku answered the question on June 28, 2017 at 12:53

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