The role played by monetary policy towards sustainable economic outcomes cannot be refuted. Kenyan government through Central bank implements various monetary policies to foster stability in the macroeconomic environment and hence, economic growth and development. Even though previous studies argue that monetary policy influence price and output in the economy through various channels, there is dearth of these evidence in the Kenyan context. Therefore, this study investigates the influence of monetary policy on real economy. Specifically, the study evaluates credit, exchange rate and asset price mechanisms on prices and real economic growth. In addition, the study determines the most effective transmission channel in Kenya and finally, to tests for granger causality between monetary policy transmission channels, inflation and output. Data from 1990 to 2020 on quarterly basis was obtained from the Central Bank of Kenya Database. The study implemented Vector Autoregressive approach upon which the impulse response functions computed to help in explaining how economic growth and prices responds to shocks in the monetary policy instruments. In addition, granger causality test was conducted to examine the causality relationship between monetary policy instruments and output variables. The study established that both asset price and M1 money growth channels of monetary transmission had mixed results. It was also found that both credit and exchange rate were very effective monetary policy transmission mechanisms with respect to both GDP per capita and consumer price index in Kenya. Furthermore, credit channel is more effective pass-through mechanism to both GDP per capita and CPI. It was recommended that monetary authorities should maintain the base lending rates and also strengthen exchange rates for stability in other macroeconomics.

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