The Impact of Exchange Rate on Economic Growth in Kenya (2,000 to 2018)

Abstract

This research project investigated the impact of exchange rate on economic growth in Kenya, covering the period 2000 to 2018, using quarterly time series data. In the course of study, the researcher employed the following major tests: Augmented Dickey Fuller Test (ADF) for stationarity, Johansen Test for co-integration, Vector Error Correction Model (VECM) for checking the existence of long run relationships among the variables. In conducting unit roots Test, it was found out that all the variables were not stationary. Then, all the variables were subjected to the first and second differencing and became stationary all. In administering Johansen co-integration test, it reveals that there is a long run relationship, which means there is a co-integration among the variables. VECM results also show that exchange rate is significant and has positive impact on economic growth in Kenya. Furthermore, the study establishes that capital, labour, inflation, FDI and domestic savings are significant and have negative impacts on economic growth in Kenya. The study does recommend that the government of Kenya should implement its monetary policy by ensuring that a foreign exchange market is stabilized in order to achieve a general macroeconomic stability. Other policy recommendations include: employment of capital intensive technique to replace a rudimental capital employed as per this study, lowering of interest rate to attract local and international investors to acquire loans to boost production of output, and training of unskilled labour force to make it productive and compatible to capital intensive technique which is a modern means of production.