Effects of Foreign Remittances on Inflation in Kenya

Abstract

Understanding effect of remittances on macroeconomic variables like inflation is crucial since, they play vital role in economic development of recipient economies. The study therefore, seeks to examine the effects of foreign remittances on inflation rate in Kenya using quarterly data for the period 2004-2015. Stationary analysis shows that all the variables in the model are integrated of order (1), hence, the study applied Johansen maximum likelihood co-integration technique to check the presence of long run relationship between remittances and inflation. Results indicated the existence of at least three (3) co-integration vectors. Error Correction Model (ECM) was then used to check the extent and direction of relationship between variables. All factors analyzed show a positive effect on inflation rate, except real GDP. The results of the analysis also found out that a one percent increase in foreign remittance inflows increases inflation rate by 0.09 percent in the long -run.