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

List of Tables

Table 1: Consumer price index (CPI) in Rwanda 3

Table 2: Money Supply in Rwanda 55

Table 3: Nominal Interest Rate in Rwanda 56

Table 4: Nominal Exchange Rate in Rwanda 58

Table 5: Summary of Unity root Test using PP and ADF tests 60

Table 6: Results of Johansen Cointegration Test 62

List of Figures

Figure 1: Monetary targeting Framework 3

Figure 2: Consumer Price Index 33

Figure 3: Development of money supply (in billions of RWF) 40

Figure 4: Consumer Price Index (CPI) in Rwanda 54

Figure 5: Money Supply in Rwanda 56

Figure 6: Nominal Interest Rate in Rwanda 57

Figure 7: Nominal Exchange Rate in Rwanda 59

Figure 8: Response of CPI to Monetary Policy Variables 63

Abbreviations and Acronyms

ADF :	Augmented Dickey- Fuller
AFDB :	African Development Bank
BNR :	Banque Nationale du Rwanda
BOP :	Balance of Payment
CIP :	Crop Intensification Program
CPI :	Consumer Price Index
CUSUM :	Cumulative Sum
ECM :	Error Correction Model
EDPRS :	Economic Development and Poverty Reduction Strategy
ESAF :	Enhanced Structural Adjustment Facilities
EXCH :	Exchange Rate
GDP :	Gross Domestic Product
GOR :	Government of Rwanda
IMF :	International Monetary Fund
NIR :	Nominal Interest Rate
KRR :	Key Repo Rate
MINALOC :	Ministère de l' Administration Locale
MINECOFIN :	Ministry of Finance and Economic Planning
M2 :	Money Supply
NBR :	National Bank of Rwanda
PP :	Phillips-Perron
RWF :	Rwandan Franc (s)
ULK :	Université Lible de Kigali

Abstract

The research study on the impact of monetary policy on Consumer price index (CPI) was conducted by taking NBR as a case study. The researcher main purpose was to evaluate the use of monetary policy on economy. The specific objectives were to find out the impact of monetary policy on CPI and to describe strategies of monetary policy in stabilizing economy.

To achieve the desired objectives, the researcher consulted different documents on monetary policy and collect 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.

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 economy.

The research found that the National Bank of Rwanda uses different tools of monetary policy in order to stabilize economy.

Keywords: Money supply, Exchange rate, Nominal interest rate, monetary policy, Consumer Price Index (CPI)