1.2 Problem statement
Grinnell and Williams (1990:60) state that a problem is only a
problem when something can be done to solve it. This looks appropriate to
explain how different variables of the Monetary Policy work and manipulated to
affect the dependent variables (CPI). This will also study the relationship
among these variables by measuring the elasticity and time lag.
Monetary policy influences the aggregate demand and aggregate supply
affecting economy accordingly. Hyperinflation undermines saving on the one
hand and prompts speculation, dollarization, capital flight
through uncertainty adversely affecting the poor.
Thus, this study examines whether changes in monetary policy
can account for the changes in experienced on the economy in Rwanda. This is
done by adopting a model that allows simultaneous determination of the long run
and short run relationship between dependent variable and independent variables
in a model.
1.3 Purpose of the study
According to Lee et al., (2008) and Hacker and Hatemj, (2005)
monetary policy only has a role to play in macroeconomic stabilization if the
money demand function is stable. Indeed, to emphasize the stability of the
demand function for money as highlighted by others (Mehra, 1993). Rwanda
adopted price stability as the goal for economic stabilization (IMF, 1998: 7).
The National Bank of Rwanda utilizes the M2 monetary aggregate (NBR, 2003:
30-31) as a guide variable for price stability and the monetary base (currency
plus reserves) is considered the operating target (NBR, 2003: 33). From 2004 to
2008, net external reserves had increased (Kanimba, 2008:4). Therefore, the
exchange rate of the Rwandan franc against major international currencies
maintained a trend of a slight but continuous appreciation of the Rwandan franc
against the US dollar. In 2006, Rwanda benefited from a reduction of debt
due to activities of the IMF, the World Bank and the
African Development Bank (AFDB, 2007). In January 2008, the National Bank
of Rwanda recommended that the commercial banks increase their registered
capital (Kanimba, 2008).
1.4 Research objectives
Objectives are defined as dealing with outward things or
exhibiting facts uncolored by feeling or opinion. The objectives of the study
are divided into two forms: main objective and specific objectives.
1.4.1 General objective
The General objective of this research is to evaluate the use
of monetary policy on CPI.
1.4.2 Specific objectives
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