Short-Run Asymmetric Effects of Inflation Shocks on the Central Bank Rate in Kenya: Evidence from a Nonlinear ARDL Model

This study investigated whether positive and negative inflation shocks exert asymmetric short-run effects on the Central Bank Rate (CBR) in Kenya. Monthly data spanning June 2006 to December 2025 were analyzed using the Nonlinear Autoregressive Distributed Lag (NARDL) framework, which permits decomposition of inflation into positive and negative partial sums. The model controls for the nominal exchange rate and the U.S. federal funds rate to account for domestic and external monetary influences. A Wald test was employed to assess short-run asymmetry. Results indicate that positive and negative inflation shocks do not produce statistically different short-run effects on the CBR. The short-run symmetry hypothesis could not be rejected (F = 2.373; p = 0.1251). These findings suggest that the Central Bank of Kenya reacts similarly to inflation increases and decreases in the short run. The study contributes to monetary policy literature by providing evidence on inflation-policy rate dynamics in a developing economy operating under an inflationtargeting framework. Keywords: Inflation Shocks; Central Bank Rate; Monetary Policy; NARDL; Short-run Asymmetry