Implication of the Taylor Rule on Real Exchange Rate Movement in Kenya

Boaz Nandwa

Applied Econometrics and International Development, 2006, vol. 6, issue 2

Abstract: More often, persistent fluctuations in the real exchange rate tends to have significant adverse impact on prices, output and inflation expectations in an economy. Therefore, the ability to predict its movement over time with relative degree of accuracy is imperative for effective monetary policy formulation and implementation. In this study, we examine the movement of the Kenyan Shilling against the US Dollar by comparing fitted with the actual real exchange rate trends in the context of a modified Taylor rule. We find that, except for the period marked by exchange rate volatility, the modified Taylor rule maps well the actual movement in real exchange rate and hence, it can reliably be used to predict future trends in the real exchange rate.

Keywords: Monetary policy; Taylor rule; exchange rate; central bank and Kenya (search for similar items in EconPapers)
JEL-codes: C52 E52 E58 (search for similar items in EconPapers)
Date: 2006
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