The Effect of Selected Macro-economic Variables on Exchange Rates in Kenya

Mwangi PM, Ochieng DE. "The Effect of Selected Macro-economic Variables on Exchange Rates in Kenya." African development finance journal. 2017;1(2):162-177.


Purpose – This paper sought to establish the effect of selected macro-economic variables
on exchange rates in Kenya. The selected macro-economic variables for this study were
interest rates, inflation rates and trade flows.
Methodology – The study was modeled as a descriptive survey. A data collection sheet
was used to collect secondary data from the published bulletin and other publications by
Central Bank of Kenya and Kenya National Bureau of Statistics for a period of ten years
between 2006 and 2015. The data was examined using descriptive, correlation and
regression analyses.
Findings - Results of the study showed that interest rate had a positive correlation
coefficient of 0.446 with exchange rate, Inflation rate and exchange rate had a correlation
coefficient of negative 0.395 while the Level of aggregation of trade flows had a
correlation coefficient of positive 0.829 to the exchange rate. The value of R square was
0.745, a discovery that 74.5 percent of the deviations in exchange rates in Kenya
occurred due to changes in interest rate, inflation rate and trade flows at 95 percent
confidence level. The significance value obtained was less than p=0.05 implying that the
model was statistically significant in predicting how the macro economic variables of
interest rate, inflation rate and trade flows affect exchange rates in Kenya.
Implications - The Kenyan shilling has been depreciating in value over the years
implying a weakening of its purchasing power in the international markets. Policy makers
should come up with policies that will contribute to reversing this trend. Managing the
prevailing levels of inflation, interest rates and trade flows will be key as they have been
found to significantly affect exchange rates.
Value - The study will act as a guide to variou

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