Abstract

This paper investigated the trade-off and inflation drivers based on the Phillips curve framework to determine the relationship and their impact between inflation, unemployment and output for Kenyan case from 2006:M1 to 2016:M12 by contrasting the 2SLS on 2 different measures of marginal cost with 3 differently instrumented shocks. Results confirmed; (1) significant trade-off that reduced inflation by 2.09% and 0.08% when unemployment and output respectively increase by 1%, while, 1% increase in output demeaned unemployment by 0.02%, (2) the forward-looking inflation and unemployment significantly drive observed inflation, and (3) unlike monetary supply, oil shocks best accounts for the observed dynamics. Although laudable policies been implemented by fiscal and macro-economic planners, they have not achieved the odds to sufficiently contain the import shocks, making both unemployment and the rational expectations to significantly drive the observed inflation. However, revisiting of the incumbent fiscal policies and their tight implementation would facilitate long term price stabilities to reduce the inflationary dynamics. To the significant import shocks, the state should foster feasible macro-economic diversifications, investments policies, modern technologies in real economic activity production, and renewable energy sourcing that would facilitate robust economic growth that would curb large revenue outflows due to commodity imports and cushioning the devaluation of the Kenyan shilling.

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