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

par Sylvie NIBEZA
Kigali Independent University (ULK) - Master Degree 2014

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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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