Diaspora Remittances and Dutch Disease in Kenya
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Date
2014-03-07
Authors
Korir, Paul Kipkemoi
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Abstract
Diaspora remittances to Kenya have seen a sharp and sustained rise over years,
increasing from under $383 million in 2004 to over $890 million in 2011. This
has not gone without leaving its macroeconomic impacts. According to Central
Bank of Kenya, these remittances have led to higher savings and investments and
consumption. Remittances however, can lead to the appreciation of a country's
real exchange rate and hurt its competitiveness, a phenomenon known as Dutch
disease. The overvalued real exchange rate makes the country's exports relatively
expensive, imports cheaper and thus puts pressure on the country's current
account.
This study examined the relationship between Diaspora remittances and real
effective exchange rate in Kenya and established the impacts of real effective
exchange rate changes on net exports in Kenya. The study used secondary time
series data that was obtained from Central Bank of Kenya, Kenya Bureau of
Statistics, the IFS and the World Bank.
Regression analysis was carried out using vector error correction (VECM)
approach to examme the relationship between Diaspora remittances and real
effective exchange rate and then applied VAR to find the impact of REER on net
exports
Description
Department of Applied Economics, 84pg. 2013