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Research Article | Volume 1 Issue 3 (May, 2020)
Inflation, Balance of Payments and Exchange Rate in Kenya
 ,
Under a Creative Commons license
Open Access
Published
Oct. 31, 2020
Abstract
Kenya has had inflation fluctuation over the over years. The CBK has always put efforts to maintain the inflation rate at 5% with a variation of 2.5%. Despite the efforts to achieve the vision 2030 goal, fluctuations are experienced. Exchange rate has been varying over years globally but in Kenya it has been increasingly varying. The increment in the exchange rate raises the prices levels and affects the production of imports. Policies on the exchange rate enhance the control of inflation as well as making the domestic goods compete internationally. Hence, the study was to establish the relationship between exchange rate and Inflation in Kenya in the short run between 2012-2018. Purchasing Power Parity was used to establish the relationship between inflation and exchange rate while the theory of absolute advantage and monetary approach was used to establish the relationship between exchange rate and BOP in Kenya. The data was collected from sources including CBK and KNBS, then diagnostic test was done for stationarity. Granger causality was used to determine the monthly relationship between the three macroeconomic variables. The results found that the p-vale was greater than the critical values, hence fail to reject the null hypothesis, therefore no granger causality between inflation and exchange rate in the short run, indicating that exchange rate is not the best variable for policy implication in the control of inflationary economy. Henceforth, the government can factor other economic variables such as interest rate in short run to stabilize the variations in the inflation in Kenya.
Keywords
Inflation
Balance of payments and Exchange Rate.
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