A dynamic model of inflation for Kenya, 1974-96

This paper analyses the dynamics of inflation in Kenya between 1974 and 199 6, a period characterised by external shocks and internal disequilibria. By developing a parsimonious and empirically constant model, we find that til e exchange rate, foreign prices and terms of trade have long-run effects on inflation, while money supply and interest rate only have short-run effect s. Inertia is found to be important up until 1993, when about 40% of the cu rrent inflation was carried over to the next quarter. After 1993, inertia d rops to about 10%. Moreover; inflation is also influenced by changes in mai ze-grain prices, indicating a non-negligible role for agricultural supply c onstraints in the inflation process.