Abstract
The tea sector plays an important role in the Kenyan economy mainly through employment, contribution to Gross Domestic Product (GDP) and foreign exchange earnings. However, the sector faces a number of risks including but not limited to production, technological, price and market risks, legal and personal risks. Price and exchange rate volatility is one of the main sources of risk in the agribusiness sector. This paper sought to determine if foreign income, exchange rate, relative prices, price and exchange rate volatility have effects on Kenya’s black tea export demand. The study used panel data from World Bank and Central Bank of Kenya statistical bulletins for the period 1997 to 2010. Price and exchange volatility cannot be observed directly and were thus computed using Moving Average Standard Deviation (MASD) method. Sixteen major importer countries of Kenya’s tea were considered in the study. Im Peseran and Shin (IPS) unit root tests were used for testing the variables for the presence of unit roots. The study employed dynamic heterogeneous panel techniques developed by Peseran and Shin using autoregressive distributed lag (ARDL) model in the error correction form. The empirical model was estimated using pooled mean group (PMG) estimator. The study found that growth in foreign income and changes in price and exchange rate volatility were significant in the long and short run. Proportional changes in relative prices and foreign exchange rate were insignificant in the long run and short run. Key words: Price volatility, exchange rate volatility, Kenya’s black tea exports, autoregressive distributed lag (ARDL) model, pooled mean group (PMG) estimation.
Highlights
Research has shown that commodity price fluctuations in the era of economic globalization and increased liberalization of commodity markets have seriously affected the weaker economies of the developing world (Byerlee et al, 2006; Ivanic and Martin, 2008)
autoregressive distributed lag (ARDL) (1,1,1,1,1) was chosen because attempts to add lags led to non-convergence of the model due to overparametization a common problem with pooled mean group (PMG), mean group (MG) and dynamic fixed effects (DFE) models (Samargandi et al, 2013)
The results show that in the long run, two variables; foreign income (GDP as proxy), and exchange rate volatility were statistically significant
Summary
Research has shown that commodity price fluctuations in the era of economic globalization and increased liberalization of commodity markets have seriously affected the weaker economies of the developing world (Byerlee et al, 2006; Ivanic and Martin, 2008). Economic reforms with the aim of liberalization of domestic markets were adopted by most developing countries in the 1980 and 1990s.
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