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Research paper thumbnail of Does exchange rate Volatility Harm exports? Empirical evidence from Kenya’s Tea and Horticulture Exports CSAE Conference

or members of the Board of the Central Bank of Kenya. The study investigates the impact of real e... more or members of the Board of the Central Bank of Kenya. The study investigates the impact of real exchange rate volatility on Kenya’s exports of horticulture and tea in an export demand framework which also includes relative prices which is a measure of competitiveness and foreign incomes capturing foreign economic activity. The study applies cointegration techniques and error correction modelling to Kenyan monthly data over the post-liberalization period, from 1997:01 to 2007:9. The results indicate the existence of long-run relationships and show that real exchange rate volatility has negative effects both in the short-run and the long-run. In the long-run or cointegrating equations, the foreign income elasticities turn out to be around unity, that is, 1.19 for horticulture and 1.03 for tea while the relative price elasticities are-1.28 for horticulture and-0.53 for tea. The results demonstrate the important role played by exchange rate volatility as it is shown to have adverse effe...

Research paper thumbnail of Does the Exchange Rate Matter for Kenya’s Exports? A Bounds Testing Approach by

Prepared for presentation at the African Econometric Society 2007

Research paper thumbnail of Does the Exchange Rate Matter for Kenya's Exports? A Bounds Testing Approach

The study investigates the impact of the real exchange rate on the demand for Kenya’s exports in ... more The study investigates the impact of the real exchange rate on the demand for Kenya’s exports in an export demand framework which also includes economic activity for Kenya’s major export categories: tea, coffee, horticulture and manufactured goods. Bounds testing and ARDL approaches to the analysis of long-run relationships and error correction modeling are applied. The existence of long-run relationships is established for coffee, tea and horticulture exports but rejected for manufactured goods exports. The results indicate that the real exchange rate has positive effects in the short-run but the effects are found to be statistically insignificant. Nevertheless, the short-run elasticities are high and positive as in the case of coffee and manufactured goods which are close to unity. The results however confirm the dominant role played by economic prosperity of the export destination countries as demonstrated by significant positive long-run and short-run elasticities. The short-run...

Research paper thumbnail of Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya: A Behavioral Equilibrium Exchange Rate Approach

This paper examines the real exchange rate misalignment in Kenya using quarterly data over the pe... more This paper examines the real exchange rate misalignment in Kenya using quarterly data over the period 2000 – 2014. The Behavioral Equilibrium Exchange Rate (BEER) approach to determine the extent of exchange rate misalignment is adopted. A vector error correction model (VECM) is estimated and the results show that the real exchange rate is largely driven by fundamentals. Thus, the equilibrium real exchange rate has been closely aligned to its long run equilibrium level, save for instances when misalignment occurred due to major economic shock such as the recent global financial crisis and the Euro zone economic crisis. Hence, given the managed float regime in Kenya, exchange rates keep adjusting to changing economic fundamentals.

Research paper thumbnail of Current Account Sustainability in the Eac Countries: An Empirical Analysis of the Relationship Between Exports and Imports

This study examines cointegration between exports and imports of goods and services in the EAC co... more This study examines cointegration between exports and imports of goods and services in the EAC countries to assess sustainability of current account deficits in the EAC countries. Using the Engle-Granger approach and the Johansen methodology the results confirm cointegration between exports and imports for all EAC countries. It is shown that though exports and imports may drift apart in the short-run, they tend to converge to equilibrium in the long-run suggesting that the macroeconomic policies being pursued in the region have been effective in bringing exports and imports into long-run equilibrium and thus ensuring stability in the current account. The five EAC countries are therefore not in contravention of their international budget constraint. The close relationship between exports and imports is further shown to rely mainly on causality running from exports to imports as expected since imports are known to consist of inputs into the production process. The reverse causality fo...

Research paper thumbnail of Consumption Characteristics of Vegetable Oils in Kenya: The Case Study of Rural Processed Oils - Final Report

Research paper thumbnail of Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks

The purpose of this study is to determine the factors contributing to real exchange rate fluctuat... more The purpose of this study is to determine the factors contributing to real exchange rate fluctuations in Kenya; whether the real exchange rate responds more to real or to nominal shocks. A vector autoregression framework is applied in the analysis yielding impulse responses and decompositions of the forecast error variance. The results demonstrate the important role played by real shocks in causing exchange rate fluctuations, in particular highlighting the predominant role played by demand shocks. It is also shown that shocks hitting the Kenyan economy are asymmetric to shocks affecting the US economy. Thus, the Kenyan economy is buffeted by idiosyncratic shocks which are more country specific. Consequently, it can be argued that the exchange rate plays an important role as a shocks absorber in the Kenyan context.

Research paper thumbnail of Some Empirical Evidence on the Stability of Money Demand in Kenya

International Journal of Economics and Financial Issues, Sep 12, 2014

This study examines the stability of the demand for money in Kenya owing to conflicting results d... more This study examines the stability of the demand for money in Kenya owing to conflicting results derived from previous studies which have cast doubt on the relevance of monetary targeting. Bounds testing techniques are applied and an error correction model estimated. Demand for broad monetary aggregates is shown to be stable. Moreover, the real income elasticity estimates derived in the analysis are reasonably within the range expected in the Baumol-Tobin framework while the interest rate (Treasury bill rate) elasticity is in the expected range of-0.1 to-0.5. An uncertainty variable incorporated in the model is found to have positive effects on demand for broad monetary aggregates particularly M2 money demand, implying that uncertainty drives economic agents to subsequently switch to relatively liquid assets. The finding that demand for broad monetary aggregates is stable can be interpreted to mean that monetary targeting remains relevant in the Kenyan context.

Research paper thumbnail of Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks

Research paper thumbnail of Oil Price Pass-Through Into Inflation in Kenya

Research paper thumbnail of External Shocks and Real Exchange Rate Movements in Kenya

Research paper thumbnail of Does the Exchange Rate Matter for Kenya's Exports? A Bounds Testing Approach

Research paper thumbnail of Oil Price Pass-Through Into Inflation in Kenya

Research paper thumbnail of Determinants of Interest Rate Spread: Some Empirical Evidence from Kenya’s Banking Sector

International Business Research, 2014

This paper analyzes the role played by bank and industry-specific factors as well as macroeconomi... more This paper analyzes the role played by bank and industry-specific factors as well as macroeconomic variables in the determination of interest margins in Kenya's banking sector. Decomposition of the spread using income and balance sheet of the banking sector as a whole and panel data analysis of 39 commercial banks yielded consistent results which highlight the significant role played by bank and industry specific factors and macroeconomic variables in interest rate spread determination. It is shown that between 7-10 per cent of the interest margin was attributable to operating costs. Moreover, a 1 per cent increase in operating costs translates to 0.38 per cent increase in interest margins for the sample of banks studied. In addition, a 1 per cent increase in non-performing loans leads to an upward adjustment of interest margins by 0.12 per cent. Macroeconomic factors also contribute to changes in the interest margin. A 1 per cent increase in Treasury bill rates leads to an upward adjustment of interest margins by 0.1 per cent. Likewise, a 1 per cent increase in GDP growth and exchange rate variability results in 0.05 and 0.06 per cent increase in interest spread respectively. In contrast, a 1 per cent increase in loans-liabilities ratio (reflecting degree of intermediation) results in interest margin reduction by 0.17per cent. The results therefore emphasize the need to improve banking sector efficiency, deal with non-performing loans and maintain general macroeconomic stability.

Research paper thumbnail of The P-Star Model of Inflation and Its Performance for the Kenyan Economy

International Journal of Economics and Finance, 2013

The aim of this study was to extend the P-Star methodology by applying an alternative approach to... more The aim of this study was to extend the P-Star methodology by applying an alternative approach to the derivation of the foreign price gap; to estimate the P-Star model using Kenyan data over the period from 1960 to 2011 and finally, to compare the forecasting performance of the P-Star model with alternative inflation models. The results from the estimated P-Star model show that the domestic price gap has highly significant positive effects on inflation in Kenya with the implied result that a 1 per cent increase in domestic price gap leads in the subsequent period to an increase in inflation by 0.5 per cent. On the other hand, the foreign price gap was found to have insignificant effects on inflation. When forecasts from the P-Star model are compared with forecasts from alternative inflation models, the P-Star model outperforms these models. Policy wise, the results in this study underscore the usefulness of the P-Star model in providing forecasts of inflation for Kenya.

Research paper thumbnail of Does exchange rate Volatility Harm exports? Empirical evidence from Kenya’s Tea and Horticulture Exports CSAE Conference

or members of the Board of the Central Bank of Kenya. The study investigates the impact of real e... more or members of the Board of the Central Bank of Kenya. The study investigates the impact of real exchange rate volatility on Kenya’s exports of horticulture and tea in an export demand framework which also includes relative prices which is a measure of competitiveness and foreign incomes capturing foreign economic activity. The study applies cointegration techniques and error correction modelling to Kenyan monthly data over the post-liberalization period, from 1997:01 to 2007:9. The results indicate the existence of long-run relationships and show that real exchange rate volatility has negative effects both in the short-run and the long-run. In the long-run or cointegrating equations, the foreign income elasticities turn out to be around unity, that is, 1.19 for horticulture and 1.03 for tea while the relative price elasticities are-1.28 for horticulture and-0.53 for tea. The results demonstrate the important role played by exchange rate volatility as it is shown to have adverse effe...

Research paper thumbnail of Does the Exchange Rate Matter for Kenya’s Exports? A Bounds Testing Approach by

Prepared for presentation at the African Econometric Society 2007

Research paper thumbnail of Does the Exchange Rate Matter for Kenya's Exports? A Bounds Testing Approach

The study investigates the impact of the real exchange rate on the demand for Kenya’s exports in ... more The study investigates the impact of the real exchange rate on the demand for Kenya’s exports in an export demand framework which also includes economic activity for Kenya’s major export categories: tea, coffee, horticulture and manufactured goods. Bounds testing and ARDL approaches to the analysis of long-run relationships and error correction modeling are applied. The existence of long-run relationships is established for coffee, tea and horticulture exports but rejected for manufactured goods exports. The results indicate that the real exchange rate has positive effects in the short-run but the effects are found to be statistically insignificant. Nevertheless, the short-run elasticities are high and positive as in the case of coffee and manufactured goods which are close to unity. The results however confirm the dominant role played by economic prosperity of the export destination countries as demonstrated by significant positive long-run and short-run elasticities. The short-run...

Research paper thumbnail of Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya: A Behavioral Equilibrium Exchange Rate Approach

This paper examines the real exchange rate misalignment in Kenya using quarterly data over the pe... more This paper examines the real exchange rate misalignment in Kenya using quarterly data over the period 2000 – 2014. The Behavioral Equilibrium Exchange Rate (BEER) approach to determine the extent of exchange rate misalignment is adopted. A vector error correction model (VECM) is estimated and the results show that the real exchange rate is largely driven by fundamentals. Thus, the equilibrium real exchange rate has been closely aligned to its long run equilibrium level, save for instances when misalignment occurred due to major economic shock such as the recent global financial crisis and the Euro zone economic crisis. Hence, given the managed float regime in Kenya, exchange rates keep adjusting to changing economic fundamentals.

Research paper thumbnail of Current Account Sustainability in the Eac Countries: An Empirical Analysis of the Relationship Between Exports and Imports

This study examines cointegration between exports and imports of goods and services in the EAC co... more This study examines cointegration between exports and imports of goods and services in the EAC countries to assess sustainability of current account deficits in the EAC countries. Using the Engle-Granger approach and the Johansen methodology the results confirm cointegration between exports and imports for all EAC countries. It is shown that though exports and imports may drift apart in the short-run, they tend to converge to equilibrium in the long-run suggesting that the macroeconomic policies being pursued in the region have been effective in bringing exports and imports into long-run equilibrium and thus ensuring stability in the current account. The five EAC countries are therefore not in contravention of their international budget constraint. The close relationship between exports and imports is further shown to rely mainly on causality running from exports to imports as expected since imports are known to consist of inputs into the production process. The reverse causality fo...

Research paper thumbnail of Consumption Characteristics of Vegetable Oils in Kenya: The Case Study of Rural Processed Oils - Final Report

Research paper thumbnail of Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks

The purpose of this study is to determine the factors contributing to real exchange rate fluctuat... more The purpose of this study is to determine the factors contributing to real exchange rate fluctuations in Kenya; whether the real exchange rate responds more to real or to nominal shocks. A vector autoregression framework is applied in the analysis yielding impulse responses and decompositions of the forecast error variance. The results demonstrate the important role played by real shocks in causing exchange rate fluctuations, in particular highlighting the predominant role played by demand shocks. It is also shown that shocks hitting the Kenyan economy are asymmetric to shocks affecting the US economy. Thus, the Kenyan economy is buffeted by idiosyncratic shocks which are more country specific. Consequently, it can be argued that the exchange rate plays an important role as a shocks absorber in the Kenyan context.

Research paper thumbnail of Some Empirical Evidence on the Stability of Money Demand in Kenya

International Journal of Economics and Financial Issues, Sep 12, 2014

This study examines the stability of the demand for money in Kenya owing to conflicting results d... more This study examines the stability of the demand for money in Kenya owing to conflicting results derived from previous studies which have cast doubt on the relevance of monetary targeting. Bounds testing techniques are applied and an error correction model estimated. Demand for broad monetary aggregates is shown to be stable. Moreover, the real income elasticity estimates derived in the analysis are reasonably within the range expected in the Baumol-Tobin framework while the interest rate (Treasury bill rate) elasticity is in the expected range of-0.1 to-0.5. An uncertainty variable incorporated in the model is found to have positive effects on demand for broad monetary aggregates particularly M2 money demand, implying that uncertainty drives economic agents to subsequently switch to relatively liquid assets. The finding that demand for broad monetary aggregates is stable can be interpreted to mean that monetary targeting remains relevant in the Kenyan context.

Research paper thumbnail of Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks

Research paper thumbnail of Oil Price Pass-Through Into Inflation in Kenya

Research paper thumbnail of External Shocks and Real Exchange Rate Movements in Kenya

Research paper thumbnail of Does the Exchange Rate Matter for Kenya's Exports? A Bounds Testing Approach

Research paper thumbnail of Oil Price Pass-Through Into Inflation in Kenya

Research paper thumbnail of Determinants of Interest Rate Spread: Some Empirical Evidence from Kenya’s Banking Sector

International Business Research, 2014

This paper analyzes the role played by bank and industry-specific factors as well as macroeconomi... more This paper analyzes the role played by bank and industry-specific factors as well as macroeconomic variables in the determination of interest margins in Kenya's banking sector. Decomposition of the spread using income and balance sheet of the banking sector as a whole and panel data analysis of 39 commercial banks yielded consistent results which highlight the significant role played by bank and industry specific factors and macroeconomic variables in interest rate spread determination. It is shown that between 7-10 per cent of the interest margin was attributable to operating costs. Moreover, a 1 per cent increase in operating costs translates to 0.38 per cent increase in interest margins for the sample of banks studied. In addition, a 1 per cent increase in non-performing loans leads to an upward adjustment of interest margins by 0.12 per cent. Macroeconomic factors also contribute to changes in the interest margin. A 1 per cent increase in Treasury bill rates leads to an upward adjustment of interest margins by 0.1 per cent. Likewise, a 1 per cent increase in GDP growth and exchange rate variability results in 0.05 and 0.06 per cent increase in interest spread respectively. In contrast, a 1 per cent increase in loans-liabilities ratio (reflecting degree of intermediation) results in interest margin reduction by 0.17per cent. The results therefore emphasize the need to improve banking sector efficiency, deal with non-performing loans and maintain general macroeconomic stability.

Research paper thumbnail of The P-Star Model of Inflation and Its Performance for the Kenyan Economy

International Journal of Economics and Finance, 2013

The aim of this study was to extend the P-Star methodology by applying an alternative approach to... more The aim of this study was to extend the P-Star methodology by applying an alternative approach to the derivation of the foreign price gap; to estimate the P-Star model using Kenyan data over the period from 1960 to 2011 and finally, to compare the forecasting performance of the P-Star model with alternative inflation models. The results from the estimated P-Star model show that the domestic price gap has highly significant positive effects on inflation in Kenya with the implied result that a 1 per cent increase in domestic price gap leads in the subsequent period to an increase in inflation by 0.5 per cent. On the other hand, the foreign price gap was found to have insignificant effects on inflation. When forecasts from the P-Star model are compared with forecasts from alternative inflation models, the P-Star model outperforms these models. Policy wise, the results in this study underscore the usefulness of the P-Star model in providing forecasts of inflation for Kenya.