CHAPTER FIVE: SUMMARY,
CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter presents the summary of the study and it provides
conclusions and recommendations.
5.1 Summary
The research study on the impact of monetary policy on
Consumer price index was conducted by taking NBR as a case study. Our main
purpose was to evaluate the use of monetary policy and the specific objectives
were to describe strategies of monetary policy in stabilizing economy and to
determine the impact of monetary policy on Consumer price index (CPI).
To achieve the desired objectives, the researcher consulted
different documents on monetary policy and collected Secondary data on
different time series where they obtained data were tested for stationarity in
order to avoid regression involving non-stationary variables which can lead to
misleading inferences. ADF and PP tests were used to check for stationarity.
Engle- Granger two steps procedure and the Johansen Maximum Likelihood
Methodology were used to see whether variables are co integrated or not. All
those two tests revealed that there is no cointegration among our variables.
And this has leaded us to the use of impulse response in order to estimate the
impacts of monetary policy on Consumer price index (CPI).
The research found that the National Bank of Rwanda uses
different tools of monetary policy in order to stabilize economy. It uses them
in attempting to achieve the objectives of the monetary policy. With those
tools, money supply, credit, interest rates and other monetary variables can be
manipulated by the central bank of Rwanda in order to stabilize Rwandan
economy. When the central bank wants to reduce money supply or credit
availability, it sells the securities to the public. On the other hand if the
central bank wants to increase money supply and credit availability, it buys
securities from the public. The central bank can manipulate the reserve
requirements in order to influence money available to commercial banks and the
public.
When the central bank wants the money supply reduced, it
increases the reserves required and by reducing it, it increases money supply.
The central bank can achieve its objective by charging high or
low discount rate to commercial banks depending on its desire. Whenever, the
central bank wants a reduction in money supply, it raises the bank rate and
vice versa. By selling or buying foreign exchange, the Central Bank ensures
that the exchange rate is at levels that do not affect domestic money supply in
undesired direction.
With a direct credit control, the available savings can be
allocated and investment can be directed in particular directions. And the
central bank can persuade commercial banks to follow certain paths such as
credit restraint or expansion, increased savings mobilization and promotion of
exports through financial support, which otherwise they may not do, on the
basis of their risk/return assessment.
By using tools of econometrics, the research founds that the
monetary policy can affect the Consumer price index (CPI) and the following
have been found:
ü The nominal exchange rate has been increasing during
the period under consideration .And an increase in nominal exchange rate of
Rwanda has an effect of increasing quickly inflation in the first year, and in
the second year it becomes stationary while it increases again in the third
year and becomes stationary in the following years. In general, the increase in
nominal exchange rate has an effect of increasing the inflation in Rwanda as
the blue line is above the natural path.
ü The nominal interest rate has also been increasing
.Increase of nominal interest rate in Rwanda has an effect of decreasing
inflation in the first two years. However, in the third year, inflation
increases again and reaches its level of beginning in the fourth and fifth
year. In the following years, inflation is found to decrease.
ü Money supply has been found to increase during the
period under consideration, but it decreased considerably in 2006, but from
that year, the money supply started also to increase again. When there is an
increase in money supply in Rwanda, inflation decreases considerably in the
first year. However, in the second year, inflation start increasing again and
it reaches its original level in the seventh but it increases again in the
tenth year.
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