Effect of Real Exchange Rate Volatility and Selected Macroeconomic Variables on Trade Exports Performance in Kenya

Abstract

Kenya’s export performance is still constraint by high level of inflation, high-interest rates, low savings, low investments, and fluctuating exchange rates. Generally, Kenya’s exports have performed dismally in the recent past. It is not yet clear as to whether this poor export performance can be attributed to exchange rate volatility since, existing empirical evidence show mixed findings. The study sought to establish the impact of exchange rate volatility on Kenya’s exports performance for the period 1974 – 2018. Autoregressive Distributed Lag model (ARDL) with bounds test was estimated and it was found that ARCH term t-ratio was significant which indicated that exchange rate is volatile. exchange rate volatility, terms of trade, inflation money supply and trade openness were significant. Based on these results, it is recommended the government should reconsider exchange rate policies that will prevent high exchange rate fluctuations, suggests that the monetary authorities in the Kenya should come up with monetary policy strategies that will help drive the economy better are necessary for economic expansion, Kenya should maintain its market determined exchange rate and implement a monetary policy aimed at confining inflation to levels that are at par or lower than those of trading partners, the government should review trade policies and take advantage of trade openness to reap from trade liberalization. The study further realized interdependence between exchange rate stability, macroeconomic stability and export performance and hence policy makers need to consider the existing degree and likely effects of exchange rate volatility while designing, developing and implementing trade policies in Kenyan Economy.