Foreign exchange rate and economic growth of Kenya (1987 - 2019)
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Date
2022-05
Authors
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Publisher
Kampala International University, College of Education and Management
Abstract
The purpose of the study was to assess the effect of foreign exchange rate on economic growth of Kenya (1987 to 2019). The objectives were to determine the trend of foreign exchange rate and economic growth of Kenya, establish the short run relationship between foreign exchange rate and economic growth of Kenya and examine the long run relationship between foreign exchange rate and economic growth of Kenya. The study was an entirely time series analysis were data was analyzed for a period between 1987 to 2019, the study adopted an ex-post facto research design were the analysis was done based on descriptive statistics to measure the level of FER and economic growth and Autoregressive Distributed Lag (ARDL) to determine the long run relationship between the variables and error correction mechanisms to determine the short-run relationship between the variables. The study results reveal that there was a general increment in the exchange rate of Kenya. The results reveal that every year that passed; the foreign exchange rate for Kenya was generally increasing. The GDP for Kenya was also increasing, compared to the foreign exchange rate, the GDP was both increasing and reducing. Secondly there was a statistically significant relationship between foreign exchange rate and economic growth in the short run. Finally, in the long run still foreign exchange rate had a non-statistically significant relationship with the economic growth of Kenya. The study concludes that the exchange rate depreciation occurred though not so much as in the cases the Kenya currency strengthened. The study revealed that economic growth of Kenya was generally decreasing and increasing secondly concludes that in the short run, the economic growth of Kenya has not been positively affected by the foreign exchange rate changes. The study shows that the prevalence of foreign exchange rate induces the economic growth in the short run thirdly the study concludes that foreign exchange rate can be an avenue for the attainment of the economic growth in Kenya. The study recommends that there is need for development of mechanisms needed for the enhancement of the foreign exchange rate intended to reduce depreciation. Secondly objective reveal that in the short run, there exist a negative relationship between foreign exchange rate and economic growth of Kenya, the study recommend for appropriate mechanisms to enhance the exchange rate, thirdly robust currency stabilization framework aimed at mitigating high exchange rate fluctuations to promote exports in Kenya hence export earnings. The government needs to seek ways of reducing the volatility of the Kenyan shilling exchange rate.
Description
A research report submitted to the college of economics and management in partial fulfillment of the requirements for award of masters of Arts in economics Kampala International University
Keywords
Foreign exchange rate, Economic growth, Kenya