From the viewpoint of monetary authorities, there are two especially pressing policy issues that potentially arise from these changes. First, more volatile capital flows combined with greater financial interconnectedness translate into a growing risk to financial stability; Second, there are implications for management of the exchange rate policy and the macroeconomy given the increasingly large and volatile financial flows.
Under a flexible exchange rate regime, large swings in capital flows can generate excessive exchange rate fluctuations which may in turn undermine macroeconomic stability. These challenges are real for Kenya.