Capital Control Liberalization And Monetary Policy In Kenya

Abstract

Economist have always considered capital as the central element of the process of economic development, the study aimed to establish the effects of capital control liberalization on monetary policy in Kenya. The Economists view that foreign investment benefits developing economies by increasing the availability of capital still holds, based on this view, the capital deficient countries heavily resort to for- eign financing as the primary source to achieve rapid economic growth and through their positive im- pact over productivity and the general economic wellbeing of the host country. Kenyan economy has accumulated a large external debt and are now facing serious debt servicing problems. The growth ex- perience of East Africa has received worldwide attention this is because Africa is seen as a new center for growth and can be an investment destination for other regions. This study is motivated on the as- sumption that this discussions ignored the experiences of developing countries in their early phase of industrialization. In addition there is a lack of proper attention on the analysis of the issue of capital inflows in the context of neo-liberal economic reforms and financial deregulation. Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset pric- ing and supply of credit in the economy. In order to lessen the impact of capital flows on financial in- stability, a number of studies and policy makers have proposed the use of capital controls. This paper considers the benefit of re-introducing capital controls as a potential instrument of monetary policy in Kenya. This paper reviews the Kenyan experience with large capital inflows over the past 15 years (June 2000-June 2015). The findings revealed that capital inflow had positive effect on monetary policy in Kenya.