Determinants of current account balance in Kenya
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Date
2015-01-28
Authors
Kimani, Samuel Mwangi
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Abstract
Current account is one of the components in the Balance of Payment of a country.
It covers all the transactions that involve the real sources (goods, services,
income).!t comprises the international balances of transactions in trade of goods
and services, factor income and current transfers. Current account balance is
significant because it is key economic indicator of country's external
performance. Despite this voluminous literature, there is hardly any consensus as
regards the determinants of the current account balance in the world Kenya
included to facilitate the policy decisions. The overall objective of this research
study was to investigate the determinants of the current account balance in
Kenya. The specific objectives were be:to identify the factors that determines the
current account balance in Kenya, to determine the magnitude of effect of each
determinant on current account balance and to identify the policy option toward
the favourable current account balance in Kenya. The study covered the 1970 to
2010 period. Vector error correction model (VECM) was employed to determine
the factors that affect the current account balances. Empirical model was
established and various econometric tests were conducted to reveal the
determinants and their strength. Results established that the 16.18% of the current
account was caused by economic growth, 17.97% was explained by exchange
rate, 19.54% was explained by current account itself, 14.74% by budget deficit,
and 15.31% by inflation while 13.88% by balance of trade in long run. On the
other hand the impact of the, budget deficit and current account balance itself are
positive while growth rate investment, balance of trade ,inflation, exchange rate
on the current account are negative. Effects of investment and savings on current
account exhibited both positive and negative but in small scale under period under
review. From results, deliberate export oriented approach through product
diversification and value addition to venture in international markets, prudent
fiscal measures by the government and stable exchange rate and inflation are
some of policy measures that can be employed by the government to stabilize
current account.
Description
Masters in Economics-Department of Applied Economics, 64p. September 2014.
Keywords
Current account balance, vector auto regression