CENTRAL BANK OF KENYA
Keynote Address
by
PROF. NJUGUNA NDUNG’U
GOVERNOR
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Kenya School of Monetary Studies, Nairobi
Tuesday, 18th November 2014

Invited Guests;
Chairman of the Central Bank of Kenya Board of Directors;
Members of the Monetary Policy Committee;
Researchers;
Distinguished Guests;
Ladies and Gentlemen:
Good Morning. It gives me great pleasure to be here this morning
at the official opening of the Research Seminar on ‘Public Debt,
Fiscal Policy and Forward Looking Monetary Policy’ organized by
the Research Centre at KSMS.
As you are aware this is the second time we are gathered here to
discuss the research findings of our researchers. A look at the
papers in today’s program shows that they are as a result of
collaborative effort of researchers in the Bank and other esteemed
institutions. Collaborative and comprehensive research is key to
good policy advice work.
Ladies and Gentlemen, the title of this research seminar touches
on a very important and current topic. Looking globally, a
number of countries are going through a time of hardship.
Public debt is a real economy problem when not sustainable.
When public debt is unsustainable, it creates a debt overhang
problem with the effect that the private sector believes the

government will raise taxes in future to pay the public debt. The
effect is on private investment since the private sector acquires a
waiting option and finally, these effects slow down growth. Thus,
the most important challenge to debt sustainability and this will
restore growth trajectory to dislodge the market from this waiting
option.
To achieve this objective many difficult and far-reaching
decisions have to be taken. Against this backdrop, forums such as
this one are essential for sharing ideas. After all, scientific
research is a central pillar of good decision-making. Therefore, I
would like to thank the Kenya School of Monetary Studies for
organising this event.
Why public debt, fiscal policy and forward looking monetary
policy? My starting point is to draw our attention to the
principal objective of macroeconomic policy, which is to achieve
sustainable economic growth in a context of macro stability. To
achieve this, monetary and fiscal policies have to play their roles
and their success is largely dependent on how they anchor
public expectations.
Ladies and gentlemen, there are interesting studies on fiscal
policy and economy growing with debt; and monetary policy and

fiscal dominance. They come to interesting conclusions, but the
most important is policy coordination.
Why is policy coordination important?
Monetary policy is about short-run decisions on the
direction of prices, and affects nominal variables; while
fiscal policy affects real variables.
It makes it easier for policy makers to achieve their stated
policy objectives in a coherent and efficient manner.
Ensures commitment to mutually agreed upon objectives,
thus helping to eliminate the problem of time inconsistency
in the design of policy.
It enhances the credibility, anchors public expectations,
ensures sustainability of fiscal and monetary policies, thus
promoting macroeconomic stability.
Ladies and gentlemen, to ensure success of policy coordination we
need either of the following:
A continuous interaction between the fiscal and monetary
authorities to decide jointly on aspects relating to policy
design and implementation, or;
A set of rules and procedures that minimize the need for
frequent interaction.
But we know all these, why was the EU zone not successful?
As noted by Sargent and Wallace in their famous article “Some
unpleasant monetarist arithmetic”, ‘tighter money today leads to

higher inflation not only eventually but starting today’. The
paradox for tight monetary policy and heavy debt expansion will
lead to economic stagnation, Eddie Buffie has demonstrated this
for a number of countries in this region. Moreover, ladies and
gentlemen, the lack of credibility of the overall policy framework
caused by the long-term inconsistency of such mix in signals
diminishes the effectiveness of monetary policy.
Our experience with fighting inflation in Kenya suggests that
inflation may be occasioned by demand side as well as supply
side factors. Monetary policy uses interest rate as an instrument to
fight inflation and anchor inflationary expectations. Fiscal
policy on the other hand raising debt domestically and using a
mix of debt instruments drives the domestic interest rate
structure. How policy makers coordinate and consolidate their
efforts not only affects expectations concerning future policies and
outcomes but can also affect the outcome of economic activity.
Ladies and gentlemen, several papers that link fiscal policy,
monetary policy and inflation have been lined up for
presentation today. As you listen to the presentations and the
discussions, it is important that we filter the conclusions first to
reach to the frontier of this subject matter and provide renewed
thinking in the policy arena. The recommendations of these
papers should fit in the policy dialogue and policy making

process to support growth and employment as envisaged in Vision
2030 in Kenya.
As I conclude, I would like to thank all the participants present.
I hope the issues addressed in today’s contributions will provide
the basis for a rewarding discussion.
Once again— you are all very welcome!
It is my pleasure to declare this workshop officially open.
Thank you