Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya 2000-2016: An Autoregressive Distributed Lag Approach
Loading...
Date
2019
Authors
Gachoki, Charles
Okeri, Susan
Korir, Julius
Journal Title
Journal ISSN
Volume Title
Publisher
IPRJB
Abstract
Purpose: This paper investigates the determinants of Kenya’s real exchange rate and
determine the real exchange rate and its misalignment from the long run equilibrium level
using quarterly data covering 2000 – 2016.
Methodology The Behavioral Equilibrium Exchange Rate approach to determine the
extent of exchange rate misalignment is adopted. The study adopted a dynamic Auto
Regressive Distributed Lag bounds testing modeling approach.
Findings: The estimation results show that, net foreign assets, productivity, world oil
prices, trade openness and terms of trade influence Kenya’s long-run real exchange rate.
However, government expenditure, and tax revenue were found to have no effect on the
real exchange rate. The study results show that the real exchange rate is driven by the
economic fundamentals and in terms of misalignment the exchange rate is overvalued to
a maximum of 5.9 percent and undervalued up to 5.2 percent but overally the magnitude
varies across the period of study. The Shilling is on average undervalued.
Unique contribution to theory, practice and policy: Kenya’s exchange rate is closely
aligned to its long run fundamentals and the adoption of the floating exchange rate
regime achieved one of the intended purpose namely reduction of exchange rate
misalignment associated with overvaluation. The monetary authority should ensure the
exchange rate remains stable and within the 6 percent range while ensuring the particular
fundamentals that can lead to overvaluation are monitored.
Description
A Research Article in the International Journal of Economics
Keywords
Misalignment, Dynamics, Fundamentals
Citation
Gachoki, C., Okeri, S., & Korir, J. (2019). DETERMINANTS OF EQUILIBRIUM REAL EXCHANGE RATE AND IT’S MISALIGNMENT IN KENYA 2000-2016: AN AUTOREGRESSIVE DISTRIBUTED LAG APPROACH. International Journal of Economics, 4(1), 16-42.