MODELING AND FORECASTING INFLATION IN KENYA: RECENT INSIGHTS FROM ARIMA AND GARCH ANALYSIS

Thabani Nyoni
Department of Economics
University of Zimbabwe, Harare, Zimbabwe

Abstract
Using annual time series data, we study inflation in Kenya over the period 1960 – 2017 using both ARIMA and GARCH approaches. Based on both minimum AIC and Theil’s U, the study presents the ARIMA (2, 2, 1) model, the ARIMA (1, 2, 0) model and the AR (1) – GARCH (1, 1) model. Our diagnostic tests indicate that the CPI series is I (2), the residuals of the ARIMA (2, 2, 1) and ARIMA (1, 2, 0) models are stationary and that both the ARIMA (2, 2, 1) and the ARIMA (1, 2, 0) models are stable. The results of this study indicate that annual inflation in Kenya is likely to continue rising. The policy implications emanating from this study are 3 – fold and are envisioned to assist policy makers in restoring and maintaining price stability in Kenya.
Key words: ARIMA, Consumer Price Index (CPI), Forecasting, GARCH, Inflation, Kenya

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