Impact of quantitative easing in the US on Kenya's Bond market between 2009 and 2014
Ngomenyi, Gitongu Alexander
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This paper examines the impact of quantitative easing (QE) by the Federal Reserve (Fed) which started in November 2008 on Kenya's bond market. In the wake of the global financial crisis, the Federal Reserve used several rounds of QE to get the economy back on track. In this, the Fed started growing its balance sheet by purchasing government bonds and mortgage-backed securities using central bank money with the aim of injecting money into the economy and boost nominal spending. Over the period from November 2008, the Fed purchased 3.5 trillion dollars of assets, significantly increasing its balance sheet. This paper attempts to assess the impact of these large scale asset purchases (LSAPs) on Kenya's treasury bills yields. This is motivated by empirical evidence indicating that QE purchases reduced long-term US government bond yields. This paper therefore undertakes to find the impact on developing countries' bond markets, specifically Kenya. US money supply and Kenya 182 day treasury bills are the variables of choice for this study. Increase in US money supply is taken to indicate the Fed's LSAPs. Using time series analysis, we conduct vector auto regression and co-integration tests to establish the presence of a relationship and therefore assess the impact. The results indicated the presence of a long term relationship between Federal Reserve's LSAPS and Kenya treasury bills.