The impact of monetary policy on consumer price index (CPI): 1985-2010

The Impact of Monetary Policy on Consumer Price Index (CPI): (1985-2010)

Sylvie NIBEZA

Department of economics, ULK-University

Corresponding Author E-mail: [e-mail]

Phone: [phone]

Declaration

I, NIBEZA Sylvie, hereby declare that the work presented in this dissertation titled «The Impact of Monetary Policy on Consumer Price Index (CPI): (1985-2010)» is my original work and it has never been submitted to any institution of learning for any award.

Signed .....................

Date: 15/11/2014

Approval

This work was done under my close supervision at Kigali Independent University supervisor.

I therefore acknowledge its authenticity and approve it as worth for the award of the Master's Degree of Science in Economics.

Signed............................................... Date 15/11/2014

Dr Moses Matundura

Dedication

To

My beloved Husband, HABAMENSHI Védaste

My Son, MUGISHA IHIRWE Willy Consolateur

My Mother, NYIRABAHIZI Agnès

My family,

All creative thinkers and Researchers.

Acknowledgements

First and foremost I thank Almighty GOD who gave me a life worth living and I thank Him for giving me the strength to accomplish this project.

My thanks go to Prof. Dr RWIGAMBA Balinda, President and Founder of Kigali Independent University (ULK) for his contribution to the development of Rwandan Higher Education and to the national development in general and good initiative deserves appreciation.

My profound gratitude is addressed to Dr. Moses Matundura, my supervisor for his immeasurable commitment, effort, positive criticisms and willingness to spare and given up his scarce time to help me acquire new skills.

I would not forget to address a word of thanks to all my lecturers in Kigali Independent University (ULK) who followed me along my academic course without their effort; I could not reach this level.

My academic education would not be possible without the support from my lovely husband Védaste HABAMENSHI. His financial and moral support was valuable in the accomplishment of my studies.

My thanks to my son Willy Consolateur MUGISHA IHIRWE, who despite their tender age endured my absence during the studies.

I also acknowledge the moral support from my mother NYIRABAHIZI Agnès, my Family and my friends.

I would like to thank all those who have, in various ways, supported me during this work, and whose their names are not written here, that they find here the expression of my deep recognition.

God bless you all.

Sylvie NIBEZA

Table of Contents

Declaration i

Approval ii

Dedication iii

Acknowledgements iv

Table of Contents v

List of Tables viii

List of Figures ix

Abbreviations and Acronyms x

Abstract xi

CHAPTER 1: INTRODUCTION TO THE STUDY 1

1.1 Background to the study 1

1.2 Problem statement 4

1.3 Purpose of the study 5

1.4 Research objectives 5

1.4.1 General objective 5

1.4.2 Specific objectives 6

1.5 Research Questions 6

1.6 Hypothesis 6

1.7 Scope of the study 6

1.8 Significance of the study 7

1.8.1 Choice of the study 7

1.8.2 Interest of study 7

1.8.2.1 Personal interest 7

1.8.2.2 Interest of the community 7

1.8.2.3 Scientific interest 8

1.9 Definitions of key terms 8

1.9.1 Money 8

1.9.2 Interest Rates 8

1.9.3 Money Supply 9

1.9.4 Exchange rate 10

1.9.5 Monetary policy 10

1.10 Organization of the dissertation 11

CHAPTER 2: LITERATURE REVIEW 12

2.1 Introduction 12

2.2 Theory of Monetary Policy 15

2.2.1 Transmission of monetary policy 17

2.2.2 Objectives of Monetary Policy 19

2.2.3 Instruments of monetary policy 23

2.2.4 Strategies of monetary policy 25

2.2.5 Taylor rule 26

2.2.6 Economic situation 28

2.2.6.1 Consumer Price Index 31

2.2.6.2 Economic effects of monetary policy 33

2.3 Monetary policy in Rwanda 35

2.3.1 Overview of monetary policy in Rwanda 35

2.3.2 Evolution of monetary policy in Rwanda 36

2.3.3 Monetary policy management 37

2.3.4 Money supply 40

2.3.5 Exchange rate 40

2.3.6 Interest rate 41

CHAPTER 3: RESEARCH METHODOLOGY 42

3.1 Introduction 42

3.2 Model Specification 42

3.3 Research Design 44

3.3.1 Quantitative and Statistics methods 44

3.4 Estimation techniques 44

3.4.1 Unit Root Test 44

3.4.2 Co-integration Test 45

3.5 Data Collection Methods and Tool 45

3.6 Sample Size 45

3.7 Statistical Test 45

3.8 Characteristics of variables 46

3.8.1 Dependent variable 46

3.8.2 Independent variables 47

3.9 Data processing 48

3.10 Limitations & Delimitations 49

CHAPTER 4: RESEARCH FINDINGS 50

4.1 Introduction 50

4.2 Strategies of monetary policy in stabilizing economy 50

4.2.1 Open market operations 50

4.2.2 Reserve requirement 51

4.2.3 Discount rate 52

4.2.4 Exchange Rate 52

4.2.5 Direct Credit Control 52

4.2.6 Moral Suasion 52

4.3 Impact of monetary policy on Consumer Price Index (CPI) 53

4.3.1 Evolution of CPI, money supply, Nominal interest rate and nominal exchange rate in

Rwanda 53

4.3.2 Econometric analysis of the impact of monetary policy on Consumer Price Index 60

4.3.2.1 Analysis of stationarity for different variables 60

4.3.2.2 Co-integration test 61

4.3.2.2.1 Estimation of an impact of monetary policy on CPI of Rwanda 62

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 65

5.1 Introduction 65

5.2 Summary 65

5.3 General conclusion 67

5.4 Recommendations 69

References 70