Sources of Exchange Rate Fluctuations in Kenya: The Relative Importance of Real and Nominal Shocks

Moses Kiptui

MPRA Paper from University Library of Munich, Germany

Abstract: The purpose of this study is to determine the factors contributing to real exchange rate fluctuations in Kenya; whether the real exchange rate responds more to real or to nominal shocks. A vector autoregression framework is applied in the analysis yielding impulse responses and decompositions of the forecast error variance. The results demonstrate the important role played by real shocks in causing exchange rate fluctuations, in particular highlighting the predominant role played by demand shocks. It is also shown that shocks hitting the Kenyan economy are asymmetric to shocks affecting the US economy. Thus, the Kenyan economy is buffeted by idiosyncratic shocks which are more country specific. Consequently, it can be argued that the exchange rate plays an important role as a shocks absorber in the Kenyan context.

Keywords: Real and Nominal shocks; exchange rates; vector autoregressions; Kenya (search for similar items in EconPapers)
JEL-codes: C32 E31 F31 F42 (search for similar items in EconPapers)
Date: 2015-01-20
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (1)

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