The Global Financial Crisis and Easing of Monetary and Fiscal Policies in Kenya: Has the Economy Achieved Internal and External Balance?

THE GLOBAL FINANCIAL CRISIS AND EASING OF MONETARY AND FISCAL POLICIES IN KENYA: HAS THE ECONOMY ACHIEVED INTERNAL AND EXTERNAL BALANCE?

CEC 702: Macroeconomics I
Assignment One

Submitted by: Peter Kitonyo
Registration No.: X80/81901/09 To: Dr. Rose Ngugi

29th January 2010
THE GLOBAL FINANCIAL CRISIS AND EASING OF MONETARY AND FISCAL POLICIES IN KENYA: HAS THE ECONOMY ACHIEVED THE INTERNAL AND EXTERNAL BALANCE?

Introduction
The global financial crisis continues to cause a considerable slowdown in most countries. Governments around the world are trying to contain the crisis, but many suggest the worst is not yet over. Stock markets went down by more than 40%. Investment banks have collapsed, rescue packages are drawn up involving more than a trillion US dollars, and interest rates have been cut around the world in what looks like a coordinated response. Leading indicators of global economic activity, such as shipping rates, are declining at alarming rates.

Rise in uncertainty in global financial markets has shaken the confidence in the financial system, exerting pressure on the tightening of financial conditions in most economies. Both of these factors are reflected in reduced consumption, exports and investments, leading to economic activity slow down and exerting pressure on fiscal indicators of budget revenues and budget deficit. On the other hand, the reduction of foreign currency inflows is accompanied by deterioration of the balance of payments indicators and the arising of depreciating pressures on exchange rate, underscoring the role of the current account stability on macroeconomic and financial balances at home and the need for taking precautions to guarantee it. In short, the financial crisis caused imbalances in both the internal and external balances of the economic systems of the world, Kenya included.

Consequently, most developed economies, USA, Euro-zone, United Kingdom, Japan as well as Kenya, eased their monetary and

References: African Economic Outlook report on Kenya, (2010) Baker, Dean (2008) “The housing bubble and the financial crisis,” Centre for economic and policy Research. Blinder, Alan (2008) “What Created this Monster?” New York Times, March 23. Bookstabber, Richard (2007b) A Demon of our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation (Hoboken, New Jersey: John Wiley & Sons). Central Bank of Kenya, (2009) “Monetary Policy Committee Meeting on 26th January 2010”, Press release Central Bank of Kenya, (2009) “Monetary Policy Statement” Central Bank of Kenya, (2008) “Monetary Policy Statement” Central Bank of Kenya, (2009) “Statistical Bulletin June 2009” Chong-Huey Wong, ( ), “Adjustment and the Internal-External Balance” Dirk, Willem (2008) “The global financial crisis and developing countries” Overseas Development Institute. Mundell, Robert A. (1962), “The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability”, Staff Paers-IMF, Vol. 9 No. 1 (Marc. 1962) Patrick (2008) “Financial Crisis-Causes and Effects”The Economy, September 2008 “The Global Financial Crisis Challenges to Africa: Kenya experience and perspective” (A presentation by Central Bank of Kenya at the Ministers and Governors Forum in Tunisia 2008). World Bank, (2009) “Still standing: Kenya’s Slow Recovery From Quadruple Shock”, (Edition No. 1 of Kenya Economic Update report) Wong, Chong-Huey, ( ), “Adjustment and the Internal-External Balance” World Bank paper for the October 2008 Commonwealth Finance Ministers meeting Wray, Randal (2007) “Lessons from the Subprime Meltdown,” Levy Institute working Paper No