1. Team Kenya

2. Outline Lessons learnt Case of Kenya: Overview
Test for Stationarity of CPI variable
VAR analysis
Policy insights

3. 1. Lessons Learnt
How to test for stationarity using appropriate models, that is, testing for validity of including trend and/or constant term.
Testing for stability / stationarity of a VAR model.
How to use Eviews.
How to interpret impulse response functions.

4. 2. Case of Kenya: Overview
Study period 2000:1 to 2013:3
Data source: Central Bank of Kenya and Kenya National Bureau of Statistics
Frequency of data: Quarterly
Variables: CPI, M3, RGDP, TB3, e, libor, oilprice
Methodology: Granger causality, Johansen cointegration test, impulse response analysis

5. 2. Test for Stationarity of CPI variable
Step 1: View time graph of variable

6. 2. Test for Stationarity of CPI variable
Step 2: Conduct ADF test using trend and intercept
F3 = against CV = 6.50
Indicating that the trend term is not significant

7. 2. Test for Stationarity of CPI variable
Step 3: Conduct ADF test using intercept
F3 = against CV = 8.73
Indicating that the constant term is not significant

8. 2. Test for Stationarity of CPI variable
Step 4: Conduct ADF test without trend or intercept
Conclusion: CPI is non stationary

9. 2. Test for Stationarity of CPI variable
Step 5: Conduct ADF test on DCPI
Conclusion: CPI is I(1)

10. 3. Estimate a VAR
Step 1: Estimate unresticted VAR on log(rgdp) log(m3) tb3 log(e) log(cpi) and exogenous variables c libor log(oilprice) and 2 lags
Step 2: Test lag length criteria
Choose lag length of 1

11. 3. Estimate a VAR
Step 3: Estimate unresticted VAR on log(rgdp) log(m3) tb3 log(e) log(cpi) and exogenous variables c libor log(oilprice) and 1 lag
Step 4: Test for VAR stability

12. 3. Estimate a VAR

13. 4. Analyse the VAR results
Step 1: Estimate impulse response functions
M3 has no impact on GDP.
TB3 has negative impact on GDP four quarters after initial shock.
Exchange rate has negative impact on GDP 5-6 quarters after the initial shock.
M3 positively impacts on CPI after 5 quarters and persists thereafter.
Interest rates and exchange rates have no significant impact on CPI.

14. 4. Analyse the VAR results
Step 2: Variance Decomposition
After 10 quarters, 77.6% of variations in GDP is attributed to itself, 7.5% to exchange rate, 7.3% to CPI, 5.2% to interest rates and 2.5% to M3.
After 10 quarters, 64.8% of variations in CPI is attributed to itself, 17.1% to GDP, 11.9% to M3, 4.5% to exchange rates and 1.5% to interest rates.

15. 4. Analyse the VAR results
Step 3: Granger Causality test
M3 and CPI granger cause GDP, while TB3 and exchange rates do not cause granger GDP.
M3 granger causes CPI.

16. 4. Analyse the VAR results
Step 4: Cointegration test
Residual seems stationary, therefore, variables are cointegrated.

17. 5. Policy insights
Excessive money is not good for inflation in the medium-term.
Raising short-term interest rates and depreciating the shilling will impact negatively on growth in the short term.

18. Thank you for listening