GOVERNMENT DEPOSITS AT THE CENTRAL BANK
AND MONETARY POLICY OPERATIONS IN A
MONETARY TARGETING FRAMEWORK: A
THRESHOLD AUTOREGRESSIVE MODEL FOR KENYA

 

Moses Muse Sichei, Daniel M. Amanja and Samuel K. Tiriongo
Central Bank of Kenya

 

ABSTRACT

The study employs a threshold autoregressive (TAR) model to estimate the level of government deposits at the Central Bank of Kenya (CBK), which triggers a regime change in monetary policy operations/liquidity management. The TAR model is applied on daily data during the period November 30, 2005 to August 10, 2010 and it establishes a threshold level of government deposits at CBK as Ksh 46,665 million with a delay parameter of 1 day. The threshold estimate is useful for cash planning and liquidity management by the CBK and the Treasury. Though the study is Kenya-specific, this analysis can be applied in any country in Sub-Saharan Africa where the interbank market is not well developed and government cashflows have significant effect on banking sector liquidity.